Common Agency and Coordination: General Theory and Application to Government Policy Making

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Abstract
The authors develop a model of common agency with complete information and general preferences with nontransferable utility, and they prove that the principals' Nash equilibrium in truthful strategies implements an efficient action. The authors apply this theory to the construction of 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 nondistorting transfers in their noncooperative equilibrium, but their intergroup competition for transfers turns into a prisoners' dilemma in which the government captures all the gain that is potentially available to the parties. Copyright 1997 by the University of Chicago.

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