Strategic Experimentation with Poisson Bandits

Sven Rady and R Keller

No 332, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies a game of strategic experimentation with two-armed bandits where the risky arm distributes lump-sum payoffs according to a Poisson process. The intensity of this process is either high or low, and unknown to the players. We consider Markov perfect equilibria with beliefs as the state variable. There is no equilibrium where all players use cut-off strategies, and all equilibria exhibit an `encouragement effect' relative to the single-agent optimum. The fact that a success on the risky arm is not fully revealing limits the payoff asymmetry as well as the inefficiency of asymmetric equilibria. We construct the unique symmetric MPE and, for a sufficiently high difference between the two possible intensities, an asymmetric equilibrium that dominates the symmetric one in terms of aggregate payoffs.

Date: 2007
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Related works:
Working Paper: Strategic Experimentation with Poisson Bandits (2009)
Working Paper: Strategic Experimentation with Poisson Bandits (2009)
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