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Breakdowns

R Keller () and Sven Rady ()

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 study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes.

Keywords: Strategic Experimentation; Two-Armed Bandit; Bayesian Learning; Poisson Process; Piecewise Deterministic Process; Markov Perfect Equilibrium; Differential-Difference Equation; Smooth Pasting; Continuous Pasting (search for similar items in EconPapers)
JEL-codes: C73 D83 O32 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-gth, nep-hpe and nep-mic
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Journal Article: Breakdowns (2015) Downloads
Working Paper: Breakdowns (2013) Downloads
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