The Role of Information in Competitive Experimentation
AbstractTechnological progress is typically a result of trial-and-error research by competing firms. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be dead ends. Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever. To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms. The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private. We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety - an early abandonment of the risky project. Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner. This mechanism restores efficiency and suggests a direction for welfare improvement.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-038.
Length: 58 pages
Date of creation: 08 Nov 2011
Date of revision:
Learning; Two-arm Bandit; R&D Competition; Dead-end Inefficiency; Trial-and-error;
Find related papers by JEL classification:
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-19 (All new papers)
- NEP-CTA-2011-12-19 (Contract Theory & Applications)
- NEP-INO-2011-12-19 (Innovation)
- NEP-MIC-2011-12-19 (Microeconomics)
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.:
- Llobet, G. & Hopenhayn, H. & Mitchell, M., 2000.
"Rewarding Sequential Innovators: Prizes, Patents and Buyouts,"
0012, Centro de Estudios Monetarios Y Financieros-.
- Hugo Hopenhayn & Gerard Llobet & Matthew Mitchell, 2006. "Rewarding Sequential Innovators: Prizes, Patents, and Buyouts," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1041-1068, December.
- Gerard Llobet & Hugo Hopenhayn & Matthew F. Mitchell, 2000. "Rewarding sequential innovators: prizes, patents and buyouts," Staff Report 273, Federal Reserve Bank of Minneapolis.
- Gerard Llobet & Hugo Hopenhayn & Matthew Mitchell, 2003. "Rewarding Sequential Innovators: Prizes, Patents and Buyouts," Levine's Working Paper Archive 618897000000000682, David K. Levine.
- Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004.
"Social Learning in One-Arm Bandit Problems,"
1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bruno Strulovici, 2008.
"Learning While Voting: Determinants of Collective Experimentation,"
Economics Series Working Papers
2008-WO8, University of Oxford, Department of Economics.
- Bruno Strulovici, 2010. "Learning While Voting: Determinants of Collective Experimentation," Econometrica, Econometric Society, vol. 78(3), pages 933-971, 05.
- Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
- Cripps, Martin William & Keller, Godfrey & Rady, Sven, 2003.
"Strategic Experimentation with Exponential Bandits,"
CEPR Discussion Papers
3814, C.E.P.R. Discussion Papers.
- Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, 01.
- Godfrey Keller & Martin Cripps, 2003. "Strategic Experimentation with Exponential Bandits," Economics Series Working Papers 143, University of Oxford, Department of Economics.
- Cripps, Martin & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," Discussion Papers in Economics 4, University of Munich, Department of Economics.
- Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
- Kaylan Chatterjee & Robert Evans, 2004. "Rivals' Search for Buried Treasure: Competition and Duplication in R&D," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 160-183, Spring.
- Francesco Squintani & Hugo Hopenhayn, 2005.
"Preemption Games with Private Information,"
2005 Meeting Papers
80, Society for Economic Dynamics.
- Dirk Bergemann & Juuso Valimaki, 2006. "Bandit Problems," Cowles Foundation Discussion Papers 1551, Cowles Foundation for Research in Economics, Yale University.
- Hugo Hopenhayn & Matthew Mitchell, 2010. "OptimalPatent Policy with Recurrent Innovators," 2010 Meeting Papers 1313, Society for Economic Dynamics.
- Kaustav Das, 2013. "Strategic Experimentation with Heterogeneous Agents and Payoff Externalities," Discussion Papers 1315, Exeter University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dolly Guarini).
If references are entirely missing, you can add them using this form.