Strategic Delay and Information Exchange in Endogenous Social Networks
Abstract
This thesis studies optimal stopping problems for strategic agents in the context of two economic applications: experimentation in a competitive market and information exchange in social networks. The economic agents (firms in the first application, individuals in the second) take actions, whose payoffs depend on an unknown underlying state. Our framework is characterized by the following key feature: agents time their actions to take advantage of either the outcome of the actions of others (experimentation model) or information obtained over time by their peers (information exchange model). Equilibria in both environments are typically inefficient, since information is imperfect and, thus, there is a benefit in being a late mover, but delaying is costly. More specifically, in the first part of the thesis, we develop a model of experimentation and innovation in a competitive multi-firm environment. Each firm receives a private signal on the success probability of a research project and decides when and which project to implement. A successful innovation can be copied by other firms. We start the analysis by considering the symmetric environment, where the signal quality is the same for all firms. Symmetric equilibria (where actions do not depend on the identity of the firm) always involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous rather than staggered experimentation. The social cost of insufficient experimentation can be arbitrarily large. Then we study the role of simple instruments in improving over equilibrium outcomes. We show that appropriately-designed patents can implement the socially optimal allocation (in all equilibria) by encouraging rapid experimentation and efficient ex post transfer of knowledge across firms.
Document Details
- Document Type
- Technical Report
- Publication Date
- Sep 01, 2010
- Accession Number
- ADA544290
Entities
People
- Kostas Bimpikis
Organizations
- Massachusetts Institute of Technology