Cripps, Martin; Keller, Godfrey; Rady, Sven (January 2003): Strategic Experimentation with Exponential Bandits. Discussion Papers in Economics 2003-2 Econometrica, 73 |

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### Abstract

This paper studies a game of strategic experimentation with two-armed bandits whose risky arm might yield a payoff only after some exponentially distributed random time. Because of free-riding, there is an inefficiently low level of experimentation in any equilibrium where the players use stationary Markovian strategies with posterior beliefs as the state variable. After characterizing the unique symmetric Markovian equilibrium of the game, which is in mixed strategies, we construct a variety of pure-strategy equilibria. There is no equilibrium where all players use simple cut-off strategies. Equilibria where players switch finitely often between the roles of experimenter and free-rider all lead to the same pattern of information acquisition; the efficiency of these equilibria depends on the way players share the burden of experimentation among them. In equilibria where players switch roles infinitely often, they can acquire an approximately efficient amount of information, but the rate at which it is acquired still remains inefficient; moreover, the expected payoff of an experimenter exhibits the novel feature that it rises as players become more pessimistic. Finally, over the range of beliefs where players use both arms a positive fraction of the time, the symmetric equilibrium is dominated by any asymmetric one in terms of aggregate payoffs.

Item Type: | Paper (Discussion Paper) |
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Published in: | Econometrica, No. 1, Vol. 73, January 2005: pp. 39-68 |

Keywords: | Strategic Experimentation ; Two-Armed Bandit ; Exponential Distribution ; Bayesian Learning ; Markov Perfect Equilibrium ; Public Goods |

Faculties: | Economics Economics > Munich Discussion Papers in Economics Economics > Munich Discussion Papers in Economics > Micro-Economics Economics > Munich Discussion Papers in Economics > Economics of Information Economics > Munich Discussion Papers in Economics > Game Theory Economics > Chairs > Chair of Dynamic Economic Theory (closed) |

Subjects: | 300 Social sciences > 300 Social sciences, sociology and anthropology 300 Social sciences > 330 Economics |

JEL Classification: | C73, D83, H41, O32 |

URN: | urn:nbn:de:bvb:19-epub-4-3 |

Language: | English |

ID Code: | 4 |

Deposited On: | 13. Apr 2005 |

Last Modified: | 06. Nov 2020 13:39 |