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

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

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1436.

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Date of creation: Jul 1996
Date of revision:
Handle: RePEc:cpr:ceprdp:1436
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