Hierarchical Experimentation

35 Pages Posted: 9 Oct 2015

See all articles by Chia-Hui Chen

Chia-Hui Chen

Institute of Economic Research, Kyoto University

Junichiro Ishida

Osaka University - Institute of Social and Economic Research

Date Written: October 7, 2015

Abstract

We consider a bandit problem faced by a team of two heterogeneous players. The team is hierarchical in that one (the principal) retains the exclusive right to terminate the project while the other (the agent) focuses strictly on implementing the project assigned to him. As a key departure, we assume that the principal may be privately informed about the project quality. In contrast to the existing literature, the belief in our model is generally non-monotonic: while each failure makes the agent less confident in the project, the uninformed principal drops out gradually over time, which partially restores his confidence. We derive explicit solutions for the agent's effort and the principal's exit decisions, which allow us to obtain a full characterization of the equilibrium. We also discuss the role of effort monitoring in this context and suggest a new rationale for delegation.

Keywords: bandit problems, experimentation, hierarchy, role specialization, war of attrition, delegation

JEL Classification: D82, D83

Suggested Citation

Chen, Chia-Hui and Ishida, Junichiro, Hierarchical Experimentation (October 7, 2015). ISER Discussion Paper No. 949, Available at SSRN: https://ssrn.com/abstract=2671653

Chia-Hui Chen

Institute of Economic Research, Kyoto University ( email )

Yoshida-Honmachi, Sakyo-ku
Kyoto, 606-8501
Japan

Junichiro Ishida (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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