Individual decision-makers consume information revealed by the previous decision makers, and produce information that may help in future decisions. This phenomenon is common in a wide range of scenarios in the Internet economy, as well as in other domains such as medical decisions. Each decision-maker would individually prefer to exploit: select an action with the highest expected reward given her current information. At the same time, each decision-maker would prefer previous decision-makers to explore, producing information about the rewards of various actions. A social planner, by means of carefully designed information disclosure, can incentivize the agents to balance the exploration and exploitation so as to maximize social welfare. We formulate this problem as a multi-armed bandit problem (and various generalizations thereof) under incentive-compatibility constraints induced by the agents Bayesian priors. We design an incentive-compatible bandit algorithm for the social planner whose regret is asymptotically optimal among all bandit algorithms (incentive-compatible or not). Further, we provide a black-box reduction from an arbitrary multi-arm bandit algorithm to an incentive-compatible one, with only a constant multiplicative increase in regret. This reduction works for very general bandit setting that incorporate contexts and arbitrary auxiliary feedback.
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