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Strategic Experimentation with Heterogeneous Agents and Payoff Externalities

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  • Kaustav Das

    (Department of Economics, University of Exeter)

Abstract

This paper analyses a two-player game of strategic experimentation with two-armed bandits.At least one of the arms is risky in the sense that it may not yield a lumpsum payoff. There is payoff externality between the players and they differ in their ability to learn across the risky arm. Either player has to decide in a continous time regarding which arm to use. Two alternative settings are analysed. The first setting has two risky arms which are perfectly negatively correlated. The other one has one safe arm and one risky arm. I show that in equilibrium (Markovian) there is always too much of duplication which implies that with respect to a social planner's solution, risky arms are explored excessively.

Suggested Citation

  • Kaustav Das, 2013. "Strategic Experimentation with Heterogeneous Agents and Payoff Externalities," Discussion Papers 1315, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:1315
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    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1315.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    R&D competition; Two-armed Bandit; Duplication; Learning.;
    All these keywords.

    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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