DISPUTE SETTLEMENT WITH SECOND‐ORDER UNCERTAINTY

Mostafa Beshkar and Jee‐Hyeong Park

International Economic Review, 2021, vol. 62, issue 4, 1433-1452

Abstract: The literature on pretrial dispute settlement has focused on the effect of first‐order uncertainty on bargaining, while assuming common knowledge about higher‐order beliefs. We study the effect of higher‐order uncertainty and show that the existence of such uncertainty improves the efficiency of settlement bargaining by expanding the set of strategies implementable 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 type. We show that such signals could improve the efficiency only if they are privately observed: The signal's informational value disappears if it is publicly observable.

Date: 2021
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https://doi.org/10.1111/iere.12519

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Working Paper: Dispute Settlement with Second-Order Uncertainty (2019)
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