Wald Revisited: The Optimal Level of Experimentation

Giuseppe Moscarini and Lones Smith

No 1176, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper revisits Wald's (1947) sequential experimentation paradigm, now assuming that an impatient decision maker can run variable-size experiments each period at some increasing and strictly convex cost before finally choosing an irreversible action. We translate this natural discrete time experimentation story into a tractable control of variance for a continuous time diffusion. Here we robustly characterize the optimal experimentation level: It is rising in the confidence about the project outcome, and for not very convex cost functions, the random process of experimentation levels has a positive drift over time. We also explore several parametric shifts unique to our framework. Among them, we discover what is arguably an 'anti-folk' result: Where the experimentation level is positive, it is often higher for a more impatient decision maker. This paper more generally suggests that a long-sought economic paradigm that delivers a sensible law of demand for information is our dynamic one namely, allowing the decision maker an eternal repurchase (resample) option.

Keywords: Learning; experimentation; sequential analysis; R&D (search for similar items in EconPapers)
JEL-codes: C11 C12 C44 C61 D81 D83 (search for similar items in EconPapers)
Pages: 37 pages
Date: 1998-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Econometrica (November 2001), 69(6): 1629-1644

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Working Paper: Wald Revisited: The Optimal Level of Experimentation (1998)
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