Exploration Is Not What It Seeks: Catalytic Exploration under Status Quo Uncertainty

TL;DR

This paper introduces the concept of catalytic exploration, where agents explore options to resolve uncertainty about the status quo, revealing complex effects on signaling, information acquisition, and welfare.

Contribution

It develops a theoretical framework decomposing option value into switching and catalytic components, revealing novel insights about exploration behavior and externalities.

Findings

High exploration rates can occur with low switching probabilities.

Agents prefer more precise information about the status quo over alternatives.

Technological improvements can paradoxically decrease welfare.

Abstract

We identify a distinct motive for search, termed catalytic exploration, where agents rationally explore alternatives they expect to reject to resolve uncertainty about the status quo. By decomposing option value into switching and catalytic components, we show that high exploration rates can coexist with bounded switching probabilities. This mechanism generates three insights. First, strong catalytic motives cause separating equilibria to collapse in signaling games as receivers explore indiscriminately. Second, agents optimally acquire more precise information about the status quo than about alternatives, reversing rational inattention intuitions. Third, catalytic exploration creates negative externalities: information technology improvements can paradoxically reduce welfare by encouraging excessive benchmarking.