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

CEPR Discussion Paper Series No. 1436

Posted: 25 Sep 1996

See all articles by Avinash Dixit

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: July 1996

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 competition 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.

JEL Classification: D0, H2

Suggested Citation

Dixit, Avinash K. and Grossman, Gene M. and Helpman, Elhanan, Common Agency and Coordination: General Theory and Application to Tax Policy (July 1996). CEPR Discussion Paper Series No. 1436, Available at SSRN: https://ssrn.com/abstract=3349

Avinash K. Dixit (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
609-258-4000 (Phone)
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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs ( email )

300 Fisher Hall
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Princeton, NJ 08544-1021
United States
609-258-4823 (Phone)
609-258-1374 (Fax)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Elhanan Helpman

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-4690 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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