Template-Type: ReDIF-Paper 1.0

Author-Name: Nicolas Klein
Author-X-Name-First: Nicolas
Author-X-Name-Last: Klein


Author-Name: Sven Rady
Author-X-Name-First: Sven
Author-X-Name-Last: Rady


Title: Negatively Correlated Bandits
	
Abstract: We analyze a two-player game of strategic experimentation with two-armed bandits.
Each player has to decide in continuous time whether to use a safe arm with a known
payoff or a risky arm whose likelihood of delivering payoffs is initially unknown. The
quality of the risky arms is perfectly negatively correlated between players. In marked
contrast to the case where both risky arms are of the same type, we find that learning
will be complete in any Markov perfect equilibrium if the stakes exceed a certain
threshold, and that all equilibria are in cutoff strategies. For low stakes, the equilibrium
is unique, symmetric, and coincides with the planner’s solution. For high stakes,
the equilibrium is unique, symmetric, and tantamount to myopic behavior. For intermediate
stakes, there is a continuum of equilibria.
Length:  26 pages
Creation-Date:  2008-02
File-URL: http://www.bgpe.de/texte/DP/040_klein_rady.pdf
File-Format: Application/pdf
File-Function: First version, 2008
Number: 040


Handle: RePEc:bav:wpaper:040_klein_rady