The Importance of Being Honest (Job Market Paper)
Abstract: This paper analyzes the case of a principal who wants to give an agent proper incentives to investigate a hypothesis which can be either true or false. The agent can shirk, thus never proving the hypothesis, or he can avail himself of a known technology to produce fake successes. This latter option either makes the provision of incentives for honesty impossible, or does not distort its costs at all. In the latter case, the principal will optimally commit to rewarding later successes even though he only cares about the first one. Indeed, after an honest success, the agent is more optimistic about his ability to generate further successes. This in turn provides incentives for the agent to be honest before a first success.
Negatively Correlated Bandits (with Sven Rady), Review of Economic Studies, 78(2): 693-732.
Abstract: We analyze a two-player game of strategic experimentation with two-armed bandits. Either player has to decide in continuous time whether to use a safe arm with a known payoff or a risky arm whose expected payoff per unit of time is initially unknown. This payoff can be high or low, and is negatively correlated across players. We characterize the set of all Markov perfect equilibria in the benchmark case where the risky arms are known to be of opposite type, and construct equilibria in cutoff strategies for arbitrary negative correlation. All strategies and payoffs are in closed form. In marked contrast to the case where both risky arms are of the same type, there always exists an equilibrium in cutoff strategies, and there always exists an equilibrium exhibiting efficient long-run patterns of learning. These results extend to a three-player game with common knowledge that exactly one risky arm is of the high payoff type.
Will Truth Out? An Advisor's Quest To Appear Competent (with Tymofiy Mylovanov)
Abstract: We study a dynamic career-concerns environment with an agent who has incentives to appear competent. It is well known that dynamic career concerns create incentives for an agent to be conservative and to tailor his actions and reports towards a commonly held prior opinion. The existing models, however, have focused on short time horizons. We show that for long time horizons there exist countervailing incentives for the agent to report his true opinion and to act in the principal's best interests. In particular, if the time horizon is sufficiently long, the agent is sufficiently patient, and the quality of the competent expert is high, the beneficial long-term incentives overwhelm any harmful myopic ones, and the incentive problem vanishes.
Strategic Learning in Teams
Abstract: This paper analyzes a two-player game of strategic experimentation with three-armed exponential bandits in continuous time. Players face replica bandits, with one arm that is safe in that it generates a known payoff, whereas the likelihood of the risky arms' yielding a positive payoff is initially unknown. It is common knowledge that the types of the two risky arms are perfectly negatively correlated. I show that the efficient policy is incentive-compatible if, and only if, the stakes are high enough. Moreover, learning will be complete in any Markov perfect equilibrium with continuous value functions if, and only if, the stakes exceed a certain threshold.
Work in Progress
Strongly Symmetric Equilibria in Bandit Games (with Johannes Hörner & Sven Rady)
Experimentation On A Continuous State Space (with Eduardo Faingold)
Nicolas A. Klein
University of Bonn
Office: 2nd floor
Tel: + 49 228 73 9241E-mail: kleinnic(at)uni-bonn(dot)de