A model of experimentation with information externalities

This paper presents a simple model of experimentation and information externality. Specifically, we analyze an experimentation game in which the consequences of the actions of each agent can be costlessly observed by other agents. Our analysis provides a complete characterization of the noncooperative equilibrium in stationary strategies. In particular, it shows that such an equilibrium is not efficient, because players stop experimenting when the social value of experimentation is still positive. We also prove, however, a Folk-type result according to which a socially efficient outcome can be sustained as an equilibrium when the players have memory of previous actions and are sufficiently patient. Finally, we indicate a large class of economic problems which provides motivation for our model and to which our approach might be applied.