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Learning Dynamics with Private and Public Signals

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  • Adam Copeland

Abstract

This paper studies the evolution of firms' beliefs in a dynamic model of technology adoption. Firms play a simple variant of the classic two-armed bandit problem, where one arm represents a known, deterministic production technology and the other arm an unknown, stochastic technology. Firms learn about the unknown technology by observing both private and public signals. I find that because of the externality associated with the public signal, the evolution of beliefs under a market equilibrium can differ significantly from that under a planner. In particular, firms experiment earlier under the planner than they do under the market equilibrium and thus firms under the planner generate more information at the start of the model. This intertemporal effect brings about the unusual result that, on a per period basis, there exist cases where firms in a market equilibrium over-experiment relative to the planner in the latter periods of the model.
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  • Adam Copeland, 2007. "Learning Dynamics with Private and Public Signals," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(3), pages 523-538, June.
    • Handle: RePEc:spr:joecth:v:31:y:2007:i:3:p:523-538
    DOI: 10.1007/s00199-006-0103-9
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    References listed on IDEAS

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    1. Jovanovic, Boyan & Rosenthal, Robert W., 1988. "Anonymous sequential games," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 77-87, February.
    2. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
    3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    4. Jensen, Richard, 1983. "Innovation adoption and diffusion when there are competing innovations," Journal of Economic Theory, Elsevier, vol. 29(1), pages 161-171, February.
    5. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
    6. Dasgupta, Amil, 2002. "Coordination, learning, and delay," LSE Research Online Documents on Economics 24955, London School of Economics and Political Science, LSE Library.
    7. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    8. Amil Dasgupta, 2002. "Coordination, Learning, and Delay," FMG Discussion Papers dp435, Financial Markets Group.
    9. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 655-675.
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    Cited by:

    1. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2015. "Learning and collusion in new markets with uncertain entry costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 273-303, February.
    2. Kaywana Raeburn & Jim Engle-Warnick & Sonia Laszlo & Jian Li, 2016. "Learning in a Bandit Game and Technology Choice," CIRANO Working Papers 2016s-47, CIRANO.

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    More about this item

    Keywords

    Social learning; Two-armed bandits; Free-rider problem; Informational public good; D62; D81; D83;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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