GROWTH UNDER UNCERTAINTY WITH EXPERIMENTATION

We introduce Bayesian learning into a stochastic growth model and stud y the effect of experimentation on the optimal level of the investment decision and on the amount of information gathering. When more invest ment produces more information, experimentation can push towards a low er level of investment, thus reducing information acquisition. Symmetr ically, when more investment reduces information, experimentation can increase investment and again decrease information gathering. These re sults run contrary to intuitions generated by the standard literature on experimentation. (C) 1998 Elsevier Science B.V. All rights reserved .