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The Role of Information in Competitive Experimentation

Author

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  • Ufuk Akcigit

    (Department of Economics, University of Pennsylvania)

  • Qingmin Liu

    (Department of Economics, University of Pennsylvania)

Abstract

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.

Suggested Citation

  • Ufuk Akcigit & Qingmin Liu, 2011. "The Role of Information in Competitive Experimentation," PIER Working Paper Archive 11-038, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:11-038
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    References listed on IDEAS

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    Cited by:

    1. Ewens, Michael & Nanda, Ramana & Rhodes-Kropf, Matthew, 2018. "Cost of experimentation and the evolution of venture capital," Journal of Financial Economics, Elsevier, vol. 128(3), pages 422-442.
    2. Ramana Nanda & Matthew Rhodes-Kropf, 2013. "Innovation and the Financial Guillotine," NBER Working Papers 19379, National Bureau of Economic Research, Inc.
    3. Arthur Campbell & Florian Ederer & Johannes Spinnewijn, 2014. "Delay and Deadlines: Freeriding and Information Revelation in Partnerships," American Economic Journal: Microeconomics, American Economic Association, vol. 6(2), pages 163-204, May.
    4. Ramana Nanda & Matthew Rhodes-Kropf, 2012. "Innovation Policies," Harvard Business School Working Papers 13-038, Harvard Business School, revised Mar 2017.
    5. Kaustav Das, 2013. "Strategic Experimentation with Heterogeneous Agents and Payoff Externalities," Discussion Papers 1315, University of Exeter, Department of Economics.
    6. Kaustav Das, 2015. "The Role of Heterogeneity in a Model of Strategic Experimentation," Discussion Papers 1507, University of Exeter, Department of Economics.

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    More about this item

    Keywords

    Learning; Two-arm Bandit; R&D Competition; Dead-end Inefficiency; Trial-and-error;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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