Dispute Settlement with Second-Order Uncertainty : The Case of International Trade Disputes

The literature on pretrial dispute settlement has studied the effect of first-order uncertainty on pre-trial settlement bargaining while assuming away any uncertainty about higher-order beliefs. We propose a settlement bargaining model in which one player receives a private and noisy signal of another player's private type, thereby generating second-order uncertainty. We find that a private signal improves the efficiency of settlement bargaining. However, if the noisy signal of types is publicly observable, thereby eliminating the second-order uncertainty, the informational value associated with the signal of types completely disappears