Dynamic Coordination and Learning

This paper examines the interplay of informational and payoff externalities in a two-player strategic investment game. Each players learns about the quality of a new technology by observing a private signal and the action of his opponent, and has the option of irreversibly adopting it. I characterize the set of equilibrium payoffs in the timing game in which there is second-mover advantage and weak benefit from coordinating. All symmetric equilibria are in mixed-strategy and involve late adoption. In contrast with the case pure informational externalities, players may invest at the same time: in the best symmetric equilibrium they first attempt to coordinate by simultaneously adopting the new technology and then randomize over investment time. In the unique non-atomic equilibrium, the introduction of payoff externalities enriches the learning dynamics, compared to existing models. For a fixed learning rate, if the payoff from preempting are significantly lower than the outcome from coordinating or being the second to invest, learning is never complete. In the extreme case in which there are no payoff externalities, learning halts over the investment period, as shown by Murto and Välimäki (2011).