This paper deals with a simple game of litigation and settlement with incomplete information. Parties are assumed to have the choice between settling their dispute out of court and resorting to costly litigation. The set of sequential equilibria is characterized and conditions are given under which an efficient equilibrium does exist. Efficient equilibria, however, will be ruled out by various tests of refinement. A comparative statics analysis is carried out with respect to the quality of private information that parties are assumed to receive before any moves have to be made.

The notion of a club efficient allocation, introduced in this paper, is shown to allow for a unifying treatment of rather disparate matters. The main result deals with the dual characterization of such allocations. The fundamental theorems of welfare economics, the limit theorem on the core, and a general version of a Henry George Theorem on the relationship between aggregate land rent and local public expenditures, all can be recovered as special cases of this paper's main result.