<p>Klette and Kortum (2004) develop a parsimonious model of innovating firms rich enough to confront firm-level evidence. It captures the dynamics of individual heterogenous firms, describes the behavior of an industry with simultaneous entry and exit, and delivers ageneral equilibrium model of technological change. At the root of the model is a <strong>Poisson process</strong> for a firm’s innovations with anarrival rate a function of its current R&amp;D and knowledge generated by its past R&amp;D.</p>

<p>Klette and Kortum, "<a href="https://1df379c8-a-c3bd8240-s-sites.googlegroups.com/a/yale.edu/kortum/Innovating%20Firms%20and%20Aggregate%20Innovation.pdf?attachauth=ANoY7coVz2P4cXcS5S4JgmSw_IwPkaFbk9lLQLedUsEYHbDxKDzcQMk7_g_oW7xSJEq_cKzR-gHC3GuNZAH8snZ8Or_LLsHvE1U5vZJo16VMf3-sLoEaejm32bsC8bSiAB9OMTMY8G1o_N_8kTpGnE6wmaCmGBKrY3uqpl3PnW2ZFVNBjso2HtqeMVRUSyX_qHG9Ko6CpRpE1Yc-NZtqfNoCNfHGE6j3e80oyVxCuY2Xg-XS5AyqHck%3D&amp;attredirects=0" rel="nofollow noreferrer">Innovating Firms and Aggregate Innovation</a>", Journal of Political Economy (2004) Vol. 112, No. 5, pp. 986-1018. </p>

CC BY-SA 4.0
2019-04-05T21:36:06.217Z
2019-04-05T21:36:06.217Z
emeryville
<p>Most of the literature on "<strong>Strategic experimentation</strong>" (or Bandits) uses Poisson processes. Here players can use either a risky or safe arm and one of them generates a fixed stream of payoffs (usually the safe arm) the other one generates lump-sum payments whose arrival times are described by a Poisson process.</p>

<p>Some examples are:</p>

<p>Klein, Nicolas, and Sven Rady. "<a href="http://restud.oxfordjournals.org/content/early/2011/03/02/restud.rdq025.short">Negatively correlated bandits.</a>" The Review of Economic Studies (2011).</p>

<p>Keller, Godfrey, and Sven Rady. "<a href="http://onlinelibrary.wiley.com/doi/10.3982/TE595/abstract">Strategic experimentation with Poisson bandits.</a>" Theoretical Economics 5.2 (2010): 275-311.</p>

<p>Keller, Godfrey, Sven Rady, and Martin Cripps. "<a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0262.2005.00564.x/abstract">Strategic experimentation with exponential bandits.</a>" Econometrica 73.1 (2005): 39-68.</p>

CC BY-SA 3.0
2015-05-02T16:53:00.740Z
Thank you for your answer!! This is indeed what I'm looking for.
Metta World Peace
CC BY-SA 3.0
2015-05-02T16:51:54.320Z
2015-05-02T16:51:54.320Z
The Almighty Bob
<p>To understand the emergence of constitution, <a href="http://home.uchicago.edu/~rmyerson/foundatn2008.pdf" rel="nofollow noreferrer">Myerson (2008)</a> models a scernario that a political leader gathers supports from captains in order to defeat challengers whose arrival is modelled by a <a href="http://en.wikipedia.org/wiki/Poisson_process" rel="nofollow noreferrer">Poisson process</a>.</p>

<p>I found using Poisson process seems to be simple and reasonable, but it is the only model I know that utilizes Poisson process.Are there any other well-known models utilizing Poisson process in a similar way? If not, what's drawback of Poisson process?</p>

<reference-request><stochastic-processes><continuous-time>
Application of Poisson process in economic modelling
Metta World Peace
# Application of Poisson process in economic modelling

(Asked by: username_0 on 2015-05-02)

To understand the emergence of constitution, [Myerson (2008)](http://home.uchicago.edu/~rmyerson/foundatn2008.pdf) models a scernario that a political leader gathers supports from captains in order to defeat challengers whose arrival is modelled by a [Poisson process](http://en.wikipedia.org/wiki/Poisson_process).

I found using Poisson process seems to be simple and reasonable, but it is the only model I know that utilizes Poisson process.Are there any other well-known models utilizing Poisson process in a similar way? If not, what's drawback of Poisson process?

**Tags:** reference-request, stochastic-processes, continuous-time


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## 2 answers

### Answer by username_2 on 2015-05-02. Score: 9 | Accepted answer

Most of the literature on "**Strategic experimentation**" (or Bandits) uses Poisson processes. Here players can use either a risky or safe arm and one of them generates a fixed stream of payoffs (usually the safe arm) the other one generates lump-sum payments whose arrival times are described by a Poisson process.

Some examples are:

Klein, Nicolas, and Sven Rady. "[Negatively correlated bandits.](http://restud.oxfordjournals.org/content/early/2011/03/02/restud.rdq025.short)" The Review of Economic Studies (2011).

Keller, Godfrey, and Sven Rady. "[Strategic experimentation with Poisson bandits.](http://onlinelibrary.wiley.com/doi/10.3982/TE595/abstract)" Theoretical Economics 5.2 (2010): 275-311.

Keller, Godfrey, Sven Rady, and Martin Cripps. "[Strategic experimentation with exponential bandits.](http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0262.2005.00564.x/abstract)" Econometrica 73.1 (2005): 39-68.

> **Comments:**
> **username_0**: Thank you for your answer!! This is indeed what I'm looking for.  

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### Answer by username_1 on 2019-04-05. Score: 3

Klette and Kortum (2004) develop a parsimonious model of innovating firms rich enough to confront firm-level evidence. It captures the dynamics of individual heterogenous firms, describes the behavior of an industry with simultaneous entry and exit, and delivers ageneral equilibrium model of technological change. At the root of the model is a **Poisson process** for a firm’s innovations with anarrival rate a function of its current R&D and knowledge generated by its past R&D.

Klette and Kortum, "[Innovating Firms and Aggregate Innovation](https://1df379c8-a-c3bd8240-s-sites.googlegroups.com/a/yale.edu/kortum/Innovating%20Firms%20and%20Aggregate%20Innovation.pdf?attachauth=ANoY7coVz2P4cXcS5S4JgmSw_IwPkaFbk9lLQLedUsEYHbDxKDzcQMk7_g_oW7xSJEq_cKzR-gHC3GuNZAH8snZ8Or_LLsHvE1U5vZJo16VMf3-sLoEaejm32bsC8bSiAB9OMTMY8G1o_N_8kTpGnE6wmaCmGBKrY3uqpl3PnW2ZFVNBjso2HtqeMVRUSyX_qHG9Ko6CpRpE1Yc-NZtqfNoCNfHGE6j3e80oyVxCuY2Xg-XS5AyqHck%3D&attredirects=0)", Journal of Political Economy (2004) Vol. 112, No. 5, pp. 986-1018.


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