Strategic Experimentation with Private Payoffs

Heidhues, Paul; Rady, Sven and Strack, Philipp (25. September 2012): Strategic Experimentation with Private Payoffs. SFB/TR 15 Discussion Paper No. 387

Abstract

We consider two players facing identical discrete-time bandit problems with a safe and a risky arm. In any period, the risky arm yields either a success or a failure, and the first success reveals the risky arm to dominate the safe one. When payoffs are public information, the ensuing free-rider problem is so severe that the equilibrium number of experiments is at most one plus the number of experiments that a single agent would perform. When payoffs are private information and players can communicate via cheap talk, the socially optimal symmetric experimentation profile can be supported as a perfect Bayesian equilibrium for sufficiently optimistic prior beliefs. These results generalize to more than two players whenever the success probability per period is not too high. In particular, this is the case when successes occur at the jump times of a Poisson process and the period length is sufficiently small.

• Item Type: Paper
• Form of publication: Preprint
• Keywords: Strategic Experimentation, Bayesian Learning, Cheap Talk, Two-Armed Bandit, Information Externality.
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A8 - Strategische Erzeugung und Weitergabe von Informationen; Economics; Economics > Chairs > Chair of Dynamic Economic Theory (closed)
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: C73, D83
• Language: English