106-1 Dispute Settlement with Second-Order Uncertainty
- Mostafa Beshkar, Jee-Hyeong Park
- 106-1.pdf
Abstract
The literature on pre-trial dispute settlement has focused on the effect of first-order uncertainty on pre-trial settlement bargaining while assuming common knowledge about higher-order beliefs. We study the effect of uncertainty regarding higher-order beliefs and show that the existence of such uncertainty improves the efficiency of settlement bargaining by expanding the set of strategies that can be implemented in the equilibrium. We introduce uncertainty about higher-order beliefs by assuming that one player privately observes an imperfect signal of the other player’s private type. We show that such signals could improve the efficiency of settlement bargaining only if they are privately observed: The informational value associated with the signal disappears if it is publicly observable.