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Learning Dynamics with Private and Public Signals

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  • Adam Copeland

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Abstract

This paper studies the evolution of firms' beliefs in a dynamic model of technology adoption. Firms play a simple variant of the classic two-armed bandit problem, where one arm represents a known, deterministic production technology and the other arm an unknown, stochastic technology. Firms learn about the unknown technology by observing both private and public signals. I find that because of the externality associated with the public signal, the evolution of beliefs under a market equilibrium can differ significantly from that under a planner. In particular, firms experiment earlier under the planner than they do under the market equilibrium and thus firms under the planner generate more information at the start of the model. This intertemporal effect brings about the unusual result that, on a per period basis, there exist cases where firms in a market equilibrium over-experiment relative to the planner in the latter periods of the model.

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File URL: http://hdl.handle.net/10.1007/s00199-006-0103-9
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 31 (2007)
Issue (Month): 3 (June)
Pages: 523-538

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Handle: RePEc:spr:joecth:v:31:y:2007:i:3:p:523-538

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Social learning; Two-armed bandits; Free-rider problem; Informational public good; D62; D81; D83;

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  1. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  2. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-85, September.
  3. Jovanovic, Boyan & Rosenthal, Robert W., 1988. "Anonymous sequential games," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 77-87, February.
  4. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  5. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  6. Amil Dasgupta, 2002. "Coordination, Learning, and Delay," FMG Discussion Papers dp435, Financial Markets Group.
  7. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  8. Jensen, Richard, 1983. "Innovation adoption and diffusion when there are competing innovations," Journal of Economic Theory, Elsevier, vol. 29(1), pages 161-171, February.
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