Strategic Learning in Teams

29 Pages Posted: 5 Aug 2010 Last revised: 4 Mar 2011

See all articles by Nicolas A. Klein

Nicolas A. Klein

University of Bonn - Institute of Economic Theory II

Date Written: July 23, 2010

Abstract

This paper analyzes a two-player game of strategic experimentation with three-armed exponential bandits in continuous time. Players face replica bandits, with one arm that is safe in that it generates a known payoff, whereas the likelihood of the risky arms' yielding a positive payoff is initially unknown. It is common knowledge that the types of the two risky arms are perfectly negatively correlated. I show that the efficient policy is incentive-compatible if, and only if, the stakes are high enough. Moreover, learning will be complete in any Markov perfect equilibrium with continuous value functions if, and only if, the stakes exceed a certain threshold.

Keywords: Strategic Experimentation, Three-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium

JEL Classification: C73, D83, O32

Suggested Citation

Klein, Nicolas A., Strategic Learning in Teams (July 23, 2010). Available at SSRN: https://ssrn.com/abstract=1652832 or http://dx.doi.org/10.2139/ssrn.1652832

Nicolas A. Klein (Contact Author)

University of Bonn - Institute of Economic Theory II ( email )

Lennestrasse 37
53113 Bonn
Germany

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