Wald Revisited: The Optimal Level of Experimentation
This paper revisits Wald's (1947) sequential experimentation paradigm, now assuming that an impatient decision maker can run variable-size experiments each period at some increasing and strictly convex cost before finally choosing an irreversible action. We translate this natural discrete time experimentation story into a tractable control of variance for a continuous time diffusion. Here we robustly characterize the optimal experimentation level: It is rising in the confidence about the project outcome, and for not very convex cost functions, the random process of experimentation levels has a positive drift over time. We also explore several parametric shifts unique to our framework. Among them, we discover what is arguably an 'anti-folk' result: Where the experimentation level is positive, it is often higher for a more impatient decision maker. This paper more generally suggests that a long-sought economic paradigm that delivers a sensible law of demand for information is our dynamic one namely, allowing the decision maker an eternal repurchase (resample) option.
|Date of creation:||May 1998|
|Date of revision:|
|Publication status:||Published in Econometrica (November 2001), 69(6): 1629-1644|
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References listed on IDEAS
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- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September.
- Cressie, Noel & Morgan, Peter B., 1993. "The VPRT: A Sequential Testing Procedure Dominating the SPRT," Econometric Theory, Cambridge University Press, vol. 9(03), pages 431-450, June.
- Dutta, Prajit K., 1997. "Optimal management of an R&D budget," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 575-602.
- Trefler, Daniel, 1993. "The Ignorant Monopolist: Optimal Learning with Endogenous Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 565-81, August.
- Joseph A. Dimasi & Grabowski, Henry G. & Vernon, John, 1995.
"R&D Costs, Innovative Output and Firm Size in the Pharmaceutical Industry,"
95-16, Duke University, Department of Economics.
- Joseph Dimasi & Henry Grabowski & John Vernon, 1995. "R&D Costs, Innovative Output and Firm Size in the Pharmaceutical Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 2(2), pages 201-219.
- repec:cup:etheor:v:9:y:1993:i:3:p:431-50 is not listed on IDEAS
- Godfrey Keller & Sven Rady, 1998.
"Optimal Experimentation in a Changing Environment,"
Game Theory and Information
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