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Exploring a Branching Structure: A Bandit Problem with Correlated Pay-offs

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  • Alison Hole
  • Godfrey Keller

Abstract

This paper presents a model of a search process for the best outcome of many multi-stage projects. The branching structure of the search environment is such that the pay-offs to various actions are correlated; nevertheless, it is shown that the optimal strategy is given by a simple reservation price rule. A simple model of R&D is provided as an example.

Suggested Citation

  • Alison Hole & Godfrey Keller, 1994. "Exploring a Branching Structure: A Bandit Problem with Correlated Pay-offs," STICERD - Theoretical Economics Paper Series 279, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stitep:279
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