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  • Keller, Godfrey


    (Department of Economics, University of Oxford)

  • Rady, Sven


    (Department of Economics, University of Bonn)

We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes.

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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 10 (2015)
Issue (Month): 1 (January)

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Handle: RePEc:the:publsh:1670
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  1. Keller, R Godfrey & Rady, Sven, 2009. "Strategic Experimentation with Poisson Bandits," CEPR Discussion Papers 7270, C.E.P.R. Discussion Papers.
  2. Moritz Meyer-ter-Vehn & Simon Board, 2009. "Reputation for Quality," 2009 Meeting Papers 160, Society for Economic Dynamics.
  3. Strulovici, Bruno & Szydlowski, Martin, 2012. "On the Smoothness of Value Functions," MPRA Paper 36326, University Library of Munich, Germany, revised 31 Jan 2012.
  4. Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic Experimentation with Private Payoffs," CEPR Discussion Papers 10634, C.E.P.R. Discussion Papers.
  5. 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.
  6. Keller, Godfrey & Rady, Sven, 2001. "Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," Discussion Papers in Economics 21, University of Munich, Department of Economics.
  7. Daron Acemoglu & Kostas Bimpikis & Asuman Ozdaglar, 2008. "Experimentation, Patents, and Innovation," NBER Working Papers 14408, National Bureau of Economic Research, Inc.
  8. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
  9. Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, 01.
  10. Erhan Bayraktar & Hao Xing, 2009. "Regularity of the Optimal Stopping Problem for Jump Diffusions," Papers 0902.2479,, revised Mar 2012.
  11. Ulrich Hege & Dirk Bergemann, 2005. "The Financing of Innovation: Learning and Stopping," Post-Print hal-00459926, HAL.
  12. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  13. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
  14. Francesco Squintani & Hugo Hopenhayn, 2005. "Preemption Games with Private Information," 2005 Meeting Papers 80, Society for Economic Dynamics.
  15. Dilip Abreu & Paul Milgrom & David Pearce, 1997. "Information and timing in repeated partnerships," Levine's Working Paper Archive 636, David K. Levine.
  16. Keller, Godfrey & Rady, Sven, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 475-507, July.
  17. Nicolas Vieille & Dinah Rosenberg & Eilon Solan, 2007. "Social Learning in One-Arm Bandit Problems," Post-Print hal-00464609, HAL.
  18. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, March.
  19. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  20. Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
  21. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
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