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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. Francesco Squintani & Hugo Hopenhayn, 2005. "Preemption Games with Private Information," 2005 Meeting Papers 80, Society for Economic Dynamics.
  2. David G. Pearce & Dilip Abreu & Paul R. Milgrom, 1988. "Information and Timing in Repeated Partnerships," Cowles Foundation Discussion Papers 875, Cowles Foundation for Research in Economics, Yale University.
  3. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
  4. Keller, Godfrey & Rady, Sven, 2009. "Strategic Experimentation with Poisson Bandits," Discussion Papers in Economics 10575, University of Munich, Department of Economics.
  5. 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.
  6. Erhan Bayraktar & Hao Xing, 2009. "Regularity of the Optimal Stopping Problem for Jump Diffusions," Papers 0902.2479,, revised Mar 2012.
  7. Bruno Strulovici & Martin Szydlowski, 2012. "On the Smoothness of Value Functions," Discussion Papers 1542, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic experimentation with private payoffs," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 531-551.
  9. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  10. Bergemann, Dirk & Hege, Ulrich, 2001. "The Financing of Innovation: Learning and Stopping," CEPR Discussion Papers 2763, C.E.P.R. Discussion Papers.
  11. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
  12. repec:bla:restud:v:66:y:1999:i:3:p:475-507 is not listed on IDEAS
  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. Biais, Bruno & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2007. "Large Risks, Limited Liability and Dynamic Moral Hazard," IDEI Working Papers 472, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2009.
  15. Godfrey Keller & Sven Rady, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 475-507.
  16. Daron Acemoglu & Kostas Bimpikis & Asuman E. Ozdaglar, 2009. "Experimentation, Patents, and Innovation," Levine's Working Paper Archive 814577000000000081, David K. Levine.
  17. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  18. Moritz Meyer-ter-Vehn & Simon Board, 2009. "Reputation for Quality," 2009 Meeting Papers 160, Society for Economic Dynamics.
  19. Keller, R Godfrey & Rady, Sven, 2001. "Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," CEPR Discussion Papers 2919, C.E.P.R. Discussion Papers.
  20. Nicolas Vieille & Dinah Rosenberg & Eilon Solan, 2007. "Social Learning in One-Arm Bandit Problems," Post-Print hal-00464609, HAL.
  21. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
  22. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2007. "Social Learning in One-Arm Bandit Problems," Econometrica, Econometric Society, vol. 75(6), pages 1591-1611, November.
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