Abstract
This paper analyzes a two-player game of strategic experimentation with three-armed exponential bandits in continuous time. Players play bandits of identical types, with one arm that is safe in that it generates a known payoff, whereas the likelihood of the risky armsʼ yielding a positive payoff is initially unknown. When the types of the two risky arms are perfectly negatively correlated, the efficient policy is an equilibrium if and only if the stakes are high enough. If the negative correlation is imperfect and stakes are high, there exists an equilibrium that leads to efficiency for optimistic enough prior beliefs.
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