Negatively Correlated Bandits

Nicolas Klein and Sven Rady ()

No 243, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We analyze a two-player game of strategic experimentation with two-armed bandits. Each player has to decide in continuous time whether to use a safe arm with a known payoff or a risky arm whose likelihood of delivering payoffs is initially unknown. The quality of the risky arms is perfectly negatively correlated between players. In marked contrast to the case where both risky arms are of the same type, we find that learn- ing will be complete in any Markov perfect equilibrium if the stakes exceed a certain threshold, and that all equilibria are in cutoff strategies. For low stakes, the equilib- rium is unique, symmetric, and coincides with the planner’s solution. For high stakes, the equilibrium is unique, symmetric, and tantamount to myopic behavior. For inter- mediate stakes, there is a continuum of equilibria.

Keywords: Strategic Experimentation; Two-Armed Bandit; Exponential Distribution; Poisson Process; Bayesian Learning; Markov Perfect Equilibrium (search for similar items in EconPapers)
JEL-codes: C73 D83 O32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gth
Date: 2008-08
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Related works:
Working Paper: Negatively Correlated Bandits (2008)
Working Paper: Negatively Correlated Bandits (2008)
Working Paper: Negatively Correlated Bandits (2008)
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