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Learning by doing and the value of optimal experimentation

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Volker Wieland

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Abstract

Research on learning-by-doing has typically been restricted to cases where estimation and control can be treated separately. Recent work has provided convergence results for more general learning problems where experimentation is an important aspect of optimal control. However the associated optimal policy cannot be derived analytically because Bayesian learning introduces a nonlinearity in the dynamic programming problem. This paper characterizes the optimal policy numerically and shows that it incorporates a substantial degree of experimentation. Dynamic simulations indicate that optimal experimentation dramatically improves the speed of learning, while separating control and estimation frequently induces a long-lasting bias in the control and target variables.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-5.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-5

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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.:
  1. Taylor, John B, 1974. "Asymptotic Properties of Multiperiod Control Rules in the Linear Regression Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 472-84, June. [Downloadable!] (restricted)
  2. Volker Wieland, 2005. "A Numerical Dynamic Programming Algorithm for Optimal Learning Problems," Computing in Economics and Finance 2005 193, Society for Computational Economics.
  3. Trefler, Daniel, 1993. "The Ignorant Monopolist: Optimal Learning with Endogenous Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 565-81, August. [Downloadable!] (restricted)
  4. Bertocchi, Graziella & Spagat, Michael, 1991. "Learning, Experimentation and Monetary Policy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1991018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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  5. Jovanovic, Boyan & Nyarko, Yaw, 1994. "The Bayesian Foundations of Learning by Doing," Working Papers 94-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  6. Kiefer, Nicholas M., 1989. "A value function arising in the economics of information," Journal of Economic Dynamics and Control, Elsevier, vol. 13(2), pages 201-223, April. [Downloadable!] (restricted)
  7. Foster, Andrew D & Rosenzweig, Mark R, 1995. "Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1176-1209, December. [Downloadable!] (restricted)
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  8. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October. [Downloadable!] (restricted)
  9. Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
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  10. Balvers, Ronald J & Cosimano, Thomas F, 1994. "Inflation Variability and Gradualist Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 721-38, October. [Downloadable!] (restricted)
  11. Prescott, Edward C, 1972. "The Multi-Period Control Problem Under Uncertainty," Econometrica, Econometric Society, vol. 40(6), pages 1043-58, November. [Downloadable!] (restricted)
  12. Anderson, T W & Taylor, John B, 1976. "Some Experimental Results on the Statistical Properties of Least Squares Estimates in Control Problems," Econometrica, Econometric Society, vol. 44(6), pages 1289-1302, November. [Downloadable!] (restricted)
  13. John B. Taylor, 1976. "Methods Of Efficient Parameter Estimation In Control Problems," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 3, pages 75-83 National Bureau of Economic Research, Inc. [Downloadable!]
  14. McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September. [Downloadable!] (restricted)
  15. Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-86, August. [Downloadable!] (restricted)
  16. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 621-54, July. [Downloadable!] (restricted)
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