Strategic Experimentation with Private Payoffs

Paul Heidhues (), Sven Rady and Philipp Strack ()

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We consider two players facing identical discrete-time bandit problems with a safe and a risky arm. In any period, the risky arm yields either a success or a failure, and the first success reveals the risky arm to dominate the safe one. When payoffs are public information, the ensuing free-rider problem is so severe that the equilibrium number of experiments is at most one plus the number of experiments that a single agent would perform. When payoffs are private information and players can communicate via cheap talk, the socially optimal symmetric experimentation profile can be supported as a perfect Bayesian equilibrium for sufficiently optimistic prior beliefs. These results generalize to more than two players whenever the success probability per period is not too high. In particular, this is the case when successes occur at the jump times of a Poisson process and the period length is sufficiently small.

Keywords: Strategic Experimentation; Bayesian Learning; Cheap Talk; Two-Armed Bandit; Information Externality. (search for similar items in EconPapers)
JEL-codes: C73 D83 (search for similar items in EconPapers)
Date: 2012-09-25
New Economics Papers: this item is included in nep-cta, nep-exp, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Strategic experimentation with private payoffs (2015)
Working Paper: Strategic Experimentation with Private Payoffs (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:387

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