Learning Dynamics with Private and Public Signals

31 Pages Posted: 28 Jan 2005

Date Written: December 2004

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.

Keywords: Informational public good, free-rider problem, two-armed bandit problem

JEL Classification: G1, G12, G14

Suggested Citation

Copeland, Adam M., Learning Dynamics with Private and Public Signals (December 2004). Available at SSRN: https://ssrn.com/abstract=655226 or http://dx.doi.org/10.2139/ssrn.655226

Adam M. Copeland (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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