NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Two-Armed Restless Bandits with Imperfect Information: Stochastic Control and Indexability

Roland G. Fryer, Jr., Philipp Harms

NBER Working Paper No. 19043
Issued in May 2013
NBER Program(s):   IO   LS

We present a two-armed bandit model of decision making under uncertainty where the expected return to investing in the "risky arm'' increases when choosing that arm and decreases when choosing the "safe'' arm. These dynamics are natural in applications such as human capital development, job search, and occupational choice. Using new insights from stochastic control, along with a monotonicity condition on the payoff dynamics, we show that optimal strategies in our model are stopping rules that can be characterized by an index which formally coincides with Gittins' index. Our result implies the indexability of a new class of "restless'' bandit models.

download in pdf format
   (473 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19043

Users who downloaded this paper also downloaded these:
Fryer, Harms, and Jackson w19114 Updating Beliefs with Ambiguous Evidence: Implications for Polarization
Einav and Levin w19035 The Data Revolution and Economic Analysis
Fryer w19113 Information and Student Achievement: Evidence from a Cellular Phone Experiment
Einav, Farronato, Levin, and Sundaresan w19021 Sales Mechanisms in Online Markets: What Happened to Internet Auctions?
Boustan, Bunten, and Hearey w19041 Urbanization in the United States, 1800-2000
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us