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Hierarchical experimentation

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  • Chen, Chia-Hui
  • Ishida, Junichiro

Abstract

We consider a bandit problem faced by a team of two heterogeneous players. The team is hierarchical in that one player (the principal) retains the exclusive right to terminate the project while the other player (the agent) focuses strictly on implementing the project assigned. As a key departure from the existing literature, we assume that the principal may be privately informed about the project quality. In contrast to the literature, the belief in our model generally follows a non-monotonic path: while each failure makes the agent less confident in the project, the uninformed principal drops out gradually over time, which partially restores the agent's motivation. We derive explicit solutions for the agent's effort and the principal's exit decisions, which allow us to obtain a full characterization of the equilibrium. Our analysis elucidates how and under what conditions an organization becomes trapped in a stagnant phase in which little action takes place.

Suggested Citation

  • Chen, Chia-Hui & Ishida, Junichiro, 2018. "Hierarchical experimentation," Journal of Economic Theory, Elsevier, vol. 177(C), pages 365-404.
  • Handle: RePEc:eee:jetheo:v:177:y:2018:i:c:p:365-404
    DOI: 10.1016/j.jet.2018.06.006
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    Cited by:

    1. Chia-Hui Chen & Junichiro Ishida, 2017. "A War of Attrition with Experimenting Players," ISER Discussion Paper 1014, Institute of Social and Economic Research, Osaka University.
    2. repec:bla:jindec:v:66:y:2018:i:2:p:377-422 is not listed on IDEAS
    3. Chia‐Hui Chen & Junichiro Ishida, 2018. "Dynamic performance evaluation with deadlines: The role of commitment," Journal of Industrial Economics, Wiley Blackwell, vol. 66(2), pages 377-422, June.
    4. Chia-Hui Chen & Junichiro Ishida, 2017. "Rewarding Mediocrity? Optimal Regulation of R&D Markets with Reputation Concerns," ISER Discussion Paper 0994, Institute of Social and Economic Research, Osaka University.

    More about this item

    Keywords

    Bandit problem; Experimentation; Hierarchy; War of attrition; Role specialization;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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