The role of information in competitive experimentation
By: Ufuk Akcigit, Qingmin Liu
Contributors: Liu, Qingmin; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17602; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17602.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.  Technological progress is typically a result of trial-and-error research by competing firms.  While some research paths lead to the innovation sought, others result in dead ends.  Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings.  Time and resources are wasted on projects that other firms have already found to be dead ends.  Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever.  To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms.  The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private.  We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety - an early abandonment of the risky project.  Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner.  This mechanism restores efficiency and suggests a direction for welfare improvement"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/17/2012.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.