The Role of Information in Competitive Experimentation

Ufuk Akcigit and Qingmin Liu

No 17602, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Technological progress is typically a result of trial-and-error research by competing firms. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be dead ends. Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever. To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms. The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private. We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety - an early abandonment of the risky project. Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner. This mechanism restores efficiency and suggests a direction for welfare improvement.

JEL-codes: D83 D92 O31 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-cta, nep-ino and nep-ppm
Note: EH PR TWP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: The Role of Information in Competitive Experimentation (2011)
Working Paper: The Role of Information in Competitive Experimentation (2011)
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