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Strategic experimentation with private payoffs

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  • Heidhues, Paul
  • Rady, Sven
  • Strack, Philipp

Abstract

We consider a game of strategic experimentation in which players face identical discrete-time bandit problems with a safe and a risky arm. In any period, the risky arm yields either a success or a failure, and the first success reveals the risky arm to dominate the safe one. When payoffs are public information, the ensuing free-rider problem is so severe that equilibrium experimentation ceases at the same threshold belief at which a single agent would stop, even if players can coordinate their actions through mediated communication. When payoffs are private information and the success probability on the risky arm is not too high, however, the socially optimal symmetric experimentation profile can be supported as a sequential equilibrium for sufficiently optimistic prior beliefs, even if players can only communicate via binary cheap-talk messages.

Suggested Citation

  • Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic experimentation with private payoffs," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 531-551.
  • Handle: RePEc:eee:jetheo:v:159:y:2015:i:pa:p:531-551
    DOI: 10.1016/j.jet.2015.07.017
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    More about this item

    Keywords

    Strategic experimentation; Two-armed bandit; Bayesian learning; Information externality; Mediated communication; Cheap talk;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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