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Breakdowns

By Godfrey Keller and Sven Rady

Abstract

We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes.

Topics: Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, A8 - Strategische Erzeugung und Weitergabe von Informationen, Volkswirtschaft, Seminar für Dynamische Modellierung (aufgelöst), ddc:330
Year: 2012
DOI identifier: 10.2139/ssrn.2191549
OAI identifier: oai:epub.ub.uni-muenchen.de:14316
Provided by: Open Access LMU

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