Breakdowns
31 Pages Posted: 21 Dec 2012
Date Written: December 18, 2012
Abstract
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.
Keywords: Strategic Experimentation, Two-Armed Bandit, Bayesian Learning, Poisson Process, Piecewise Deterministic Process, Markov Perfect Equilibrium, Differential-Difference Equation, Smooth Pasting, Continuous Pasting
JEL Classification: C73, D83, O32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Financing of Innovation: Learning and Stopping
By Dirk Bergemann and Ulrich Hege
-
Gradualism and Irreversibility
By Ben Lockwood and Jonathan Thomas
-
Strategic Experimentation with Exponential Bandits
By Martin Cripps, Godfrey Keller, ...
-
Strategic Experimentation with Exponential Bandits
By Martin Cripps, Godfrey Keller, ...
-
Strategic Experimentation with Poisson Bandits
By Godfrey Keller and Sven Rady
-
Strategic Experimentation with Poisson Bandits
By Godfrey Keller and Sven Rady
-
By Dirk Bergemann and Juuso Valimaki
-
Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly
By Godfrey Keller and Sven Rady
-
On the Smoothness of Value Functions and the Existence of Optimal Strategies