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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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File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20150175/12321/375
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Article provided by Econometric Society in its journal Theoretical Economics.

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

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Handle: RePEc:the:publsh:1670
Contact details of provider: Web page: http://econtheory.org

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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. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
  3. Francesco Squintani & Hugo Hopenhayn, 2005. "Preemption Games with Private Information," 2005 Meeting Papers 80, Society for Economic Dynamics.
  4. Bergemann, Dirk & Hege, Ulrich, 2001. "The Financing of Innovation: Learning and Stopping," CEPR Discussion Papers 2763, C.E.P.R. Discussion Papers.
  5. Godfrey Keller & Sven Rady, 1997. "Optimal Experimentation in a Changing Environment," STICERD - Theoretical Economics Paper Series /1997/333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. 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.
  7. Moritz Meyer-ter-Vehn & Simon Board, 2009. "Reputation for Quality," 2009 Meeting Papers 160, Society for Economic Dynamics.
  8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, March.
  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. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-33, November.
  11. 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.
  12. Daron Acemoglu & Kostas Bimpikis & Asuman E. Ozdaglar, 2009. "Experimentation, Patents, and Innovation," Levine's Working Paper Archive 814577000000000081, David K. Levine.
  13. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  14. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2007. "Social Learning in One-Arm Bandit Problems," Econometrica, Econometric Society, vol. 75(6), pages 1591-1611, November.
  15. 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.
  16. Keller, Godfrey & Rady, Sven, 2003. " Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 138-65, Spring.
  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. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
  19. Erhan Bayraktar & Hao Xing, 2009. "Regularity of the Optimal Stopping Problem for Jump Diffusions," Papers 0902.2479, arXiv.org, revised Mar 2012.
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