Focal Points and Economic Efficiency: The Role of Relative Label Salience

Subhasish Dugar and Quazi Shahriar

Southern Economic Journal, 2012, vol. 78, issue 3, 954-975

Abstract: Coordination games represent coordination problems that arise across social science disciplines. Focal points have been found to be an effective way to solve many of these coordination problems. We experimentally analyze the efficiency‐enhancing power of focal points in 2 × 2 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 the efficiency‐enhancing power of focal labels decreases as a measure of risk‐dominance increases across games.

Date: 2012
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https://doi.org/10.4284/0038-4038-78.3.954

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:78:y:2012:i:3:p:954-975

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