Forward-looking experimentation of correlated alternatives

• 成果类型: Article
• 署名作者: Wong, Yu Fu
• 署名单位: Pennsylvania Commonwealth System of Higher Education (PCSHE); University of Pittsburgh
• 刊物名称: THEORETICAL ECONOMICS
• ISSN/ISSBN: 1933-6837
• DOI: 10.3982/TE4960
• 发表日期: 2025-07-01
• 页码: 883-909
• 关键词: Experimentation; Brownian Motion; firm dynamics; Gibrat's law

摘要

This paper studies how a forward-looking decision maker experiments on unknown alternatives of correlated utilities. The utilities are modeled by a Brownian motion such that similar alternatives yield similar utilities. Experimentation trades off between the continuation value of exploration and the opportunity cost of exploitation. The optimal strategy is to continuously explore unknown alternatives and then exploit the best known alternative when the one being explored is found to be sufficiently worse than the best one. The decision maker explores unknown alternatives more quickly as they prove to be worse than the best known one. Applied to firm experimentation, my model predicts a conditional version of Gibrat's law and a linear relation between firm size and profitability.