Publication Date: March 2015
We analyse strategic experimentation in which information arrives through fully revealing, publicly observable “breakdowns.” With hidden actions, there exists a unique equilibrium that involves randomization over stopping times. This randomization induces belief disagreement on the equilibrium path. When actions are observable, the equilibrium is pure, and welfare improves. We analyse the role of policy interventions such as subsidies for experimentation and risk-sharing agreements. We show that the optimal risk-sharing agreement restores the ﬁrst-best outcome, independent of the monitoring structure.
Experimentation, Free-riding, Mixed strategies, Monitoring, Delay
JEL Classification Codes: C73, D83, O33