Focal Points and Economic Efficiency: Role of Relative Label Salience

Quazi Shahriar () and Subhasish Dugar ()
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Quazi Shahriar: Department of Economics, San Diego State University

No 33, Working Papers from San Diego State University, Department of Economics

Abstract: We experimentally analyze efficiency-enhancing power of focal points in 2x2 Pareto-ranked coordination games. We find that the power of focal labels, when attached to the Pareto-efficient strategy, to promote efficiency critically depends upon the alternative strategy’s label salience. When the relative salience of our focal labels is considerably weaker, focal labels mostly fail to raise expected efficiency beyond the mixed-strategy prediction. But when the relative salience of our focal labels is markedly stronger, focal labels raise expected efficiency much beyond the mixed-strategy prediction. Furthermore, we find that focal labels’ efficiency-enhancing power decreases as a measure of risk-dominance increases across games.

New Economics Papers: this item is included in nep-cbe and nep-pke
Date: 2009-09
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