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Strategic observation with exponential bandits

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  • Marlats, Chantal
  • Ménager, Lucie

Abstract

We introduce strategic observation into Keller et al. (2005)'s game of experimentation with conclusive breakthroughs. There are two players who must decide when to start and when to stop observation, given that observation is costly and stopping observation is irreversible. We construct a class of symmetric Markov Perfect Equilibria in which, on path, players fully experiment before starting observation, and allocate only a fraction of the resource to the risky arm afterwards. Each equilibrium in this class outperforms the symmetric equilibrium of Keller et al. (2005) in terms of payoffs.

Suggested Citation

  • Marlats, Chantal & Ménager, Lucie, 2021. "Strategic observation with exponential bandits," Journal of Economic Theory, Elsevier, vol. 193(C).
    • Handle: RePEc:eee:jetheo:v:193:y:2021:i:c:s0022053121000491
    DOI: 10.1016/j.jet.2021.105232
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    References listed on IDEAS

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    1. Sofia Moroni, 2019. "Experimentation in Organizations," Working Paper 6631, Department of Economics, University of Pittsburgh.
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    More about this item

    Keywords

    Strategic experimentation; Exponential two-armed bandits; Costly observation;
    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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