Common Agency and Coordination: General Theory and Application to Tax Policy
CEPR Discussion Paper Series No. 1436
Posted: 25 Sep 1996
Date Written: July 1996
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: Suggested Citation