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Negatively Correlated Bandits

  • Nicolas Klein
  • Sven Rady

We analyse a two-player game of strategic experimentation with two-armed bandits. Either player has to decide in continuous time whether to use a safe arm with a known pay-off or a risky arm whose expected pay-off per unit of time is initially unknown. This pay-off can be high or low and is negatively correlated across players. We characterize the set of all Markov perfect equilibria in the benchmark case where the risky arms are known to be of opposite type and construct equilibria in cut-off strategies for arbitrary negative correlation. All strategies and pay-offs are in closed form. In marked contrast to the case where both risky arms are of the same type, there always exists an equilibrium in cut-off strategies, and there always exists an equilibrium exhibiting efficient long-run patterns of learning. These results extend to a three-player game with common knowledge that exactly one risky arm is of the high pay-off type. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rdq025
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 2 ()
Pages: 693-732

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Handle: RePEc:oup:restud:v:78:y:2011:i:2:p:693-732
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  8. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Social Learning in One-Arm Bandit Problems," Discussion Papers 1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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