Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 2005, Volume 73, Issue 1

Strategic Experimentation with Exponential Bandits
p. 39-68

Godfrey Keller, Sven Rady, Martin Cripps

We analyze a game of strategic experimentation with two‐armed bandits whose risky arm might yield payoffs after exponentially distributed random times. Free‐riding causes an inefficiently low level of experimentation in any equilibrium where the players use stationary Markovian strategies with beliefs as the state variable. We construct the unique symmetric Markovian equilibrium of the game, followed by various asymmetric ones. There is no equilibrium where all players use simple cut‐off strategies. Equilibria where players switch finitely often between experimenting and free‐riding all yield a similar pattern of information acquisition, greater efficiency being achieved when the players share the burden of experimentation more equitably. When players switch roles infinitely often, they can acquire an approximately efficient amount of information, but still at an inefficient rate. In terms of aggregate payoffs, all these asymmetric equilibria dominate the symmetric one wherever the latter prescribes simultaneous use of both arms.

Log In To View Full Content