Settlement under the threat of conflict: The cost of asymmetric information

Abstract

I study a situation where two players disagree on the division of a good. In the first of two stages, the players can divide the good peacefully between them by signing a contract. If either or both players reject the contract, they must engage in a costly contest over the good. One of the players' valuation is assumed to be private information. The feasibility of a contract that divides the good between the players prior to the contest is determined by the expected contest outcome and thus also by the distribution of the private valuation. The findings can be applied to environmental conflicts, for example to shed some light on how a valuation study of ecosystem services in Lofoten can affect the probability of opening up the area for oil and gas exploration, and also the appropriate level of compensation to negatively affected parties.