Two-Armed Restless Bandits with Imperfect Information: Stochastic Control and Indexability

Roland Fryer () and Philipp Harms

No 19043, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a two-armed bandit model of decision making under uncertainty where the expected return to investing in the "risky arm'' increases when choosing that arm and decreases when choosing the "safe'' arm. These dynamics are natural in applications such as human capital development, job search, and occupational choice. Using new insights from stochastic control, along with a monotonicity condition on the payoff dynamics, we show that optimal strategies in our model are stopping rules that can be characterized by an index which formally coincides with Gittins' index. Our result implies the indexability of a new class of "restless'' bandit models.

JEL-codes: J0 J24 L0 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-mic and nep-ore
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