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The Role of Information in Competitive Experimentation

  • Ufuk Akcigit
  • Qingmin Liu
Registered author(s):

    Technological progress is typically a result of trial-and-error research by competing firms. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be dead ends. Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever. To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms. The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private. We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety - an early abandonment of the risky project. Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner. This mechanism restores efficiency and suggests a direction for welfare improvement.

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    File URL: http://www.nber.org/papers/w17602.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17602.

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    Date of creation: Nov 2011
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    Handle: RePEc:nbr:nberwo:17602
    Note: HE PR TWP
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    1. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
    2. Francesco Squintani & Hugo Hopenhayn, 2005. "Preemption Games with Private Information," 2005 Meeting Papers 80, Society for Economic Dynamics.
    3. Gerard Llobet & Hugo Hopenhayn & Matthew F. Mitchell, 2000. "Rewarding sequential innovators: prizes, patents and buyouts," Staff Report 273, Federal Reserve Bank of Minneapolis.
    4. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
    5. Hugo Hopenhayn & Matthew Mitchell, 2010. "OptimalPatent Policy with Recurrent Innovators," 2010 Meeting Papers 1313, Society for Economic Dynamics.
    6. Cripps, Martin & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," Discussion Papers in Economics 4, University of Munich, Department of Economics.
    7. 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.
    8. Kaylan Chatterjee & Robert Evans, 2004. "Rivals' Search for Buried Treasure: Competition and Duplication in R&D," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 160-183, Spring.
    9. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2007. "Social Learning in One-Arm Bandit Problems," Econometrica, Econometric Society, vol. 75(6), pages 1591-1611, November.
    10. Harris, Christopher & Howitt, Peter & Vickers, John & Aghion, Philippe, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Scholarly Articles 12375013, Harvard University Department of Economics.
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