This paper revisits Wald's (1947) sequential experimentation paradigm, now assuming that an impatient decision maker can run variable-size experiments each period at some increasing and strictly convex cost before finally choosing an irreversible action. We translate this natural discrete time experimentation story into a tractable control of variance for a continuous time diffusion. Here we robustly characterize the optimal experimentation level: It is rising in the confidence about the project outcome, and for not very convex cost functions, the random process of experimentation levels has a positive drift over time. We also explore several parametric shifts unique to our framework. Among them, we discover what is arguably an 'anti-folk' result: Where the experimentation level is positive, it is often higher for a more impatient decision maker. This paper more generally suggests that a long-sought economic paradigm that delivers a sensible law of demand for information is our dynamic one namely, allowing the decision maker an eternal repurchase (resample) option.
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Length: 37 pages Date of creation: May 1998 Date of revision: Publication status: Published in Econometrica (November 2001), 69(6): 1629-1644 Handle: RePEc:cwl:cwldpp:1176
Find related papers by JEL classification: C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Statistical Decision Theory; Operations Research C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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