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

Author

Listed:
  • Dixit, Avinash K
  • Grossman, Gene
  • Helpman, Elhanan

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.

Suggested Citation

  • Dixit, Avinash K & Grossman, Gene & Helpman, Elhanan, 1996. "Common Agency and Coordination: General Theory and Application to Tax Policy," CEPR Discussion Papers 1436, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1436
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    Cited by:

    1. Testa, Cecilia, 2003. "Government corruption and legislative procedures: is one chamber better than two?," LSE Research Online Documents on Economics 6642, London School of Economics and Political Science, LSE Library.
    2. Coate, Stephen, 2000. "An Efficiency Approach to the Evaluation of Policy Changes," Economic Journal, Royal Economic Society, vol. 110(463), pages 437-455, April.
    3. Rafael S. Espinosa Ramirez & Ana Torres Mata, 2004. "Corrupcion, inversion extranjera directa y reformas institucionales," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 1(1), pages 17-39, Julio-Dic.
    4. Lahiri, Sajal & Raimondos-Moller, Pascalis, 2000. "Lobbying by Ethnic Groups and Aid Allocation," Economic Journal, Royal Economic Society, vol. 110(462), pages 62-79, March.
    5. Avinash Dixit, 1996. "Special-Interest Lobbying and Endogenous Commodity Taxation," Eastern Economic Journal, Eastern Economic Association, vol. 22(4), pages 375-388, Fall.
    6. Lahiri, Sajal & Raimondos-Moller, Paschalis, 1999. "Special interest politics and aid fungibility," Economics Discussion Papers 10001, University of Essex, Department of Economics.
    7. Ilias Boultzis, 2020. "Truthful Equilibria in Generalized Common Agency Models," Papers 2007.15942, arXiv.org.
    8. Esfahanian , Homa, 2015. "Productivity Investment and Labor Force Participation in Search Equilibrium," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 10(1), pages 23-63, January.
    9. Marcel Vaillant, 1998. "Endogenous number of lobby groups in a specific factor trade model," Documentos de Trabajo (working papers) 0198, Department of Economics - dECON.
    10. Francisco Rodríguez, 2004. "Inequality, Redistribution, And Rent‐Seeking," Economics and Politics, Wiley Blackwell, vol. 16(3), pages 287-320, November.
    11. Christos Bilanakos, 2011. "Optimal Contracts and Investment in General Human Capital under Common Agency," University of Cyprus Working Papers in Economics 08-2011, University of Cyprus Department of Economics.
    12. Anna Ivanova, 2006. "Outcomes-Based Conditionality: Its Role and Optimal Design," IMF Working Papers 2006/128, International Monetary Fund.
    13. Schleich, Joachim & Orden, David, 1996. "Efficient choice among domestic and trade policies in the Grossman-Helpman Interest-Group Model," Bulletins 7458, University of Minnesota, Economic Development Center.

    More about this item

    Keywords

    Common Agency; Tax Policy;

    JEL classification:

    • D0 - Microeconomics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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