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Experimentation: Product Adoption, Bargaining and Asymmetric Information

Paper Session

Friday, Jan. 4, 2019 2:30 PM - 4:30 PM

Atlanta Marriott Marquis, M202
Hosted By: Econometric Society
  • Chair: Johannes Horner, Yale University

Approval Regulation, Liability and Withdrawal: Balancing Ex Ante Experimentation and Ex Post Learning

Emeric Henry
Sciences Po
Marco Ottaviani
Bocconi University


Dynamic adoption policies of activities with uncertain returns are characterized by three key decisions: in the ex ante experimentation phase, the decisions when to abandon experimentation and when to introduce to market; in the ex post learning phase, the decision when to withdraw following the accumulation of bad news. In a tractable continuous-time model, we study the optimal mix of the three instruments regulators employ to align the private incentives of firms: ex ante approval regulation, ex post withdrawal regulation, and liability. Our results can rationalize the large array of regulatory environments observed across applications ranging from product safety to patent protection.

Learning While Trading: Experimentation and Coasean Dynamics

Niccolo Lomys
Toulouse School of Economics


I study a dynamic bilateral bargaining problem with incomplete information where
better outside opportunities may arrive during negotiations. Gains from trade are uncertain.
In a good-match market environment, outside opportunities are not available.
In a bad-match market environment, superior outside opportunities stochastically arrive
for either or both parties. The two parties begin their negotiations with the same belief
on the type of the market environment. As arrivals are public information, learning
about the market environment is common. One party, the seller, makes price offers at
every instant to the other party, the buyer. The seller has no commitment power and the
buyer is privately informed about his own valuation. This gives rise to rich bargaining
dynamics. In equilibrium, there is either an initial period with no trade or trade starts
with a burst. Afterwards, the seller screens out buyers one by one as uncertainty about
the market environment unravels. Delay is always present, but it is inefficient only if
valuations are interdependent. Whether prices increase or decrease over time depends
on which party has a higher option value of learning. The seller exercises market power.
In particular, when the seller can clear the market in finite time at a positive price,
prices are higher than the competitive price. However, market power need not be at
odds with efficiency. Applications include durable-good monopoly without commitment,
wage bargaining in markets for skilled workers, and takeover negotiations.

Compromising Quality to Stay Relevant

Rahul Deb
University of Toronto
Matthew Mitchell
University of Toronto
Mallesh Pai
Rice University


We study a novel dynamic principal-agent framework which features adverse selection, moral hazard and no transfers. The model can be described as a bandit problem where the principal chooses between a safe and risky arm, whose type is known and whose output is controlled by a strategic agent. The principal prefers to pull the risky arm only if it is the high type whereas, irrespective of type, the agent wants to maximize the number of times it is pulled. Our main result shows that when the principal can commit, there are conditions under which the optimal dynamic mechanism induces efficient output from the risky arm. By contrast, in the absence of commitment, inefficient output must arise on path in all equilibria (subject to a mild refinement). We use our model to discuss reputation management by online content providers and by experts in organizations.

Strategic Experimentation with Asymmetric Information

Miaomiao Dong
Pennsylvania State University


I study strategic experimentation, with one player initially being better informed about the state of nature than the other. Players are otherwise symmetric, and observe past experimentation decisions and outcomes. I construct an equilibrium in which a mutual encouragement effect arises: as the public information becomes discouraging, the informed player’s high effort continuously brings in good news, encouraging the uninformed player to experiment; in return, the uninformed player’s experimentation pattern yields an increasing reward, encouraging the informed player to experiment. Due to this effect, players’ total effort can increase over time, and the uninformed player may grow increasingly optimistic, despite the discouraging public information. Moreover, creating information asymmetry improves total welfare if the informed player’s initial signal is sufficiently precise.
Alessandro Bonatti
Massachusetts Institute of Technology
Johannes Horner
Yale University
Jeffrey Ely
Northwestern University
Chiara Margaria
Boston University
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • L2 - Firm Objectives, Organization, and Behavior