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Discussion Paper Details

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Title: Overcoming Free-Riding in Bandit Games

Author(s): Johannes H�rner, Nicolas Klein and Sven Rady

Publication Date: October 2019

Keyword(s): Bayesian learning, strategic experimentation, Strongly Symmetric Equilibrium and Two-Armed Bandit

Programme Area(s): Industrial Organization

Abstract: This paper considers a class of experimentation games with L�vy bandits encompassing those of Bolton and Harris (1999) and Keller, Rady and Cripps (2005). Its main result is that efficient (perfect Bayesian) equilibria exist whenever players' payoffs have a diffusion component. Hence, the trade-offs emphasized in the literature do not rely on the intrinsic nature of bandit models but on the commonly adopted solution concept (MPE). This is not an artifact of continuous time: we prove that such equilibria arise as limits of equilibria in the discrete-time game. Furthermore, it suffices to relax the solution concept to strongly symmetric equilibrium.

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Bibliographic Reference

H�rner, J, Klein, N and Rady, S. 2019. 'Overcoming Free-Riding in Bandit Games'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14075