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Strategic Experimentation with Private Payoffs∗ (2012)
BibTeX
@MISC{Mannheim12strategicexperimentation,
author = {Universität Mannheim and Freie Universität and Berlin Humboldt-universität and Berlin Ludwig-maximilians-universität München and Rheinische Friedrich-wilhelms-universität and Bonn Zentrum and Europäische Wirtschaftsforschung Mannheim and Paul Heidhues and Sven Rady},
title = {Strategic Experimentation with Private Payoffs∗},
year = {2012}
}
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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.
Keyphrases
strategic experimentation private payoff risky arm identical discrete-time bandit problem single agent public information optimal symmetric experimentation profile risky arm yield perfect bayesian equilibrium poisson process jump time private information first success cheap talk success probability equilibrium number period length free-rider problem safe one
