Two-Armed Restless Bandits with Imperfect Information: Stochastic Control and Indexability
AbstractWe present a two-armed bandit model of decision making under uncertainty where the expected return to investing in the "risky arm'' increases when choosing that arm and decreases when choosing the "safe'' arm. These dynamics are natural in applications such as human capital development, job search, and occupational choice. Using new insights from stochastic control, along with a monotonicity condition on the payoff dynamics, we show that optimal strategies in our model are stopping rules that can be characterized by an index which formally coincides with Gittins' index. Our result implies the indexability of a new class of "restless'' bandit models.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19043.
Date of creation: May 2013
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Find related papers by JEL classification:
- J0 - Labor and Demographic Economics - - General
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- L0 - Industrial Organization - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-19 (All new papers)
- NEP-MIC-2013-05-19 (Microeconomics)
- NEP-ORE-2013-05-19 (Operations Research)
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