We analyze a two-player game of strategic experimentation with two-armed bandits. Each player has to decide in continuous time whether to use a safe arm with a known payoff or a risky arm whose likelihood of delivering payoffs is initially unknown. The quality of the risky arms is perfectly negatively correlated between players. In marked contrast to the case where both risky arms are of the same type, we find that learning will be complete in any Markov perfect equilibrium if the stakes exceed a certain threshold, and that all equilibria are in cutoff strategies. For low stakes, the equilibrium is unique, symmetric, and coincides with the planner’s solution. For high stakes, the equilibrium is unique, symmetric, and tantamount to myopic behavior. For intermediate stakes, there is a continuum of equilibria.
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Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number
040.
Nicolas Klein & Sven Rady, 2008.
"Negatively Correlated Bandits,"
Discussion Papers
243, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Godfrey Keller & Sven Rady, 2009.
"Strategic Experimentation with Poisson Bandits,"
Discussion Papers
260, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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Other versions:
Bergin, James & MacLeod, W Bentley, 1993.
"Continuous Time Repeated Games,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 21-37, February.
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