The Power of an Outside Option that Generates a Focal Point: An Experimental Investigation

Existing experimental studies (Cooper, DeJong, Forsythe and Ross, 1993; Shahriar, 2009) have shown that an outside option, when offered to one of the two players who later participate in a battle-of-the-sexes game, makes the equilibrium that favors the same player focal. This focal point arises even when the option gives that player a payoff lower than both the subgame equilibria payoffs. The source of the focal point, therefore, is not obvious from the existing studies. It is also not clear whether an outside option offered in this fashion is always likely to generate the focal point or the results in the existing studies are due to the particular outside-option payoffs considered in these studies. The current paper hypothesizes and reports experimental evidence to show that the results in the previous studies are not due to the particular outside-option payoffs considered, and the type of outside option considered in these studies can always generate the focal point as it enables the player rejecting the option signal her intended strategy choice in the subgame.