Experimentation with reputation concerns - Dynamic signalling with changing types

Abstract

This paper adapts the exponential/Poisson bandits framework to a model of reputation concerns. The result is a dynamic signalling game with changing types. We study a decision-maker who must choose the stopping time for a project of unknown quality when she is concerned both about social welfare and public beliefs about her ability, which is correlated with the project s quality. The decision-maker privately observes a Poisson process that is informative about whether the project will succeed or fail. In this setting the decision-maker has incentives to experiment for too long, both in the hope of a last-minute success, and because stopping hurts her reputation. We show, however, that exact efficiency can be achieved in equilibrium for a range of reputation concerns, provided they are not too strong. If the private signal is sufficiently informative, this range can be arbitrarily large. When efficiency cannot be achieved, distortions can take the form of excessive continuation.