DP1436 Common Agency and Coordination: General Theory and Application to Tax Policy

Author(s): Avinash K Dixit, Gene M. Grossman, Elhanan Helpman
Publication Date: July 1996
Keyword(s): Common Agency, Tax Policy
JEL(s): D0, H2
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1436

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.