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Unraveling of Cooperation in Dynamic Collaboration

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  • Suvi Vasama

Abstract

We examine collaboration in a one-arm bandit problem in which the players' actions affect the distribution over future payoffs. The players need to exert costly effort both to enhance the value of a risky technology and to learn about its current state. Both product value and learning are public goods, which gives the players incentives to free-ride on each others' actions. This leads to an inefficiently low aggregate level of effort. When the players' actions affect the distribution over future payoffs, they eventually get trapped in the low action, causing an inefficient unraveling of the game. Moreover, the players' incentives to exert effort depend on the state that in turn depends on the aggregate effort. If the players start restricting effort when the belief decreases in expectation, the two effects play in the same direction. Higher effort encourages higher effort and vice versa. Unraveling leads to multiple symmetric Markov perfect equilibria.

Suggested Citation

  • Suvi Vasama, 2016. "Unraveling of Cooperation in Dynamic Collaboration," SFB 649 Discussion Papers SFB649DP2016-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2016-048
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    References listed on IDEAS

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    1. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, January.
    2. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    3. 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 138-165, Spring.
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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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