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Focal Points and Economic Efficiency: Role of Relative Label Salience

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Author Info
Quazi Shahriar () (Department of Economics, San Diego State University)
Subhasish Dugar () (Department of Economics, University of Calgary)
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.

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Paper provided by San Diego State University, Department of Economics in its series Working Papers with number 0033.

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Length: 36 pages
Date of creation: Sep 2009
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Handle: RePEc:sds:wpaper:0033

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