Keywords: Informational public good, free-rider problem, two-armed bandit problem.
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.
Full paper (196 KB PDF)
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Last update: December 14, 2004