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Common value experimentation

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  • Eeckhout, Jan
  • Weng, Xi

Abstract

In many economic environments, agents often continue to learn about the same underlying state variable, even if they switch action. For example, a worker's ability revealed in one job or when unemployed is informative about her productivity in another job. We analyze a general setup of experimentation with common values, and show that in addition to the well-known conditions of value matching (level) and smooth pasting (first derivative), this implies that the second derivatives of the value function must be equal whenever the agent switches action. This condition holds generally whenever the stochastic process has continuous increments. The main appeal of our approach is its applicability, which is demonstrated with two applications featuring common value experimentation: strategic pricing, and job search with switching costs.

Suggested Citation

  • Eeckhout, Jan & Weng, Xi, 2015. "Common value experimentation," Journal of Economic Theory, Elsevier, vol. 160(C), pages 317-339.
    • Handle: RePEc:eee:jetheo:v:160:y:2015:i:c:p:317-339
    DOI: 10.1016/j.jet.2015.10.002
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    References listed on IDEAS

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    1. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    2. Godfrey Keller & Sven Rady, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 475-507.
    3. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, January.
    4. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-163, August.
    5. Martin W. Cripps & Jeffrey C. Ely & George J. Mailath & Larry Samuelson, 2008. "Common Learning," Econometrica, Econometric Society, vol. 76(4), pages 909-933, July.
    6. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    7. Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-1149, September.
    8. Dirk Bergemann & Juuso Välimäki, 2000. "Experimentation in Markets," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 213-234.
    9. Franz Wirl, 2008. "Reversible stopping (“switching”) implies super contact," Computational Management Science, Springer, vol. 5(4), pages 393-401, October.
    10. Theodore Papageorgiou, 2014. "Learning Your Comparative Advantages," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1263-1295.
    11. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
    12. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle," PIER Working Paper Archive 08-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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    Cited by:

    1. Braz Camargo & Elena Pastorino, 2016. "Learning-by-Employing: The Value of Commitment under Uncertainty," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 581-620.

    More about this item

    Keywords

    Common values; Experimentation; Jump-diffusion process;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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