Common Agency and Coordination: General Theory and Application to Tax Policy

Avinash Dixit, Gene Grossman and Elhanan Helpman

No 1436, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a model of common agency with complete information and general preferences with non-transferable utility, and prove that the principals’ Nash equilibrium in truthful strategies implements an efficient action. We apply this theory to construct a positive model of public finance, where organized special interests can lobby the government for consumer and producer taxes or subsidies and targeted lump-sum taxes or transfers. The lobbies use only the non-distorting transfers in their non-cooperative equilibrium, but their inter-group competitition for transfers turns into a prisoners’ dilemma in which the government captures all the gain that is potentially available to the parties. Therefore, we suggest that pressure groups capable of sustaining an ex-ante agreement will make a commitment to forgo direct transfers and to confine their lobbying to distorting taxes and subsidies.

Keywords: Common Agency; Tax Policy (search for similar items in EconPapers)
JEL-codes: D0 H2 (search for similar items in EconPapers)
Date: 1996-07
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Common Agency and Coordination: General Theory and Application to Tax Policy (1996)
Working Paper: Common Agency and Coordination: General Theory and Application to Tax Policy (1996)
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