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Breakdowns

  • Keller, Godfrey
  • Rady, Sven

We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes.

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File URL: http://epub.ub.uni-muenchen.de/14316/7/396.pdf
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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 396.

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Date of creation: Dec 2012
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Handle: RePEc:trf:wpaper:396
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  1. Hugo A. Hopenhayn & Francesco Squintani, 2011. "Preemption Games with Private Information," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 667-692.
  2. Daron Acemoglu & Kostas Bimpikis & Asuman Ozdaglar, 2008. "Experimentation, Patents, and Innovation," NBER Working Papers 14408, National Bureau of Economic Research, Inc.
  3. Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292, Cowles Foundation for Research in Economics, Yale University.
  4. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  5. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Social Learning in One-Arm Bandit Problems," Discussion Papers 1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-33, November.
  7. 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 138-65, Spring.
  8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, March.
  9. Keller, R Godfrey & Rady, Sven, 2009. "Strategic Experimentation with Poisson Bandits," CEPR Discussion Papers 7270, C.E.P.R. Discussion Papers.
  10. Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, 01.
  11. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
  12. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
  13. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
  14. Godfrey Keller & Sven Rady, 1998. "Optimal Experimentation in a Changing Environment," Game Theory and Information 9801001, EconWPA.
  15. Erhan Bayraktar & Hao Xing, 2009. "Regularity of the Optimal Stopping Problem for Jump Diffusions," Papers 0902.2479, arXiv.org, revised Mar 2012.
  16. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
  17. Strulovici, Bruno & Szydlowski, Martin, 2012. "On the Smoothness of Value Functions," MPRA Paper 36326, University Library of Munich, Germany, revised 31 Jan 2012.
  18. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  19. 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.
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