COMMON AGENCY AND COORDINATION - GENERAL-THEORY AND APPLICATION TO GOVERNMENT POLICY-MAKING

We develop a model of common agency with complete information and gene ral preferences with nontransferable utility, and we prove that the pr incipals' Nash equilibrium in truthful strategies implements an effici ent action. We apply this theory to the construction of a positive mod el of public finance, where organized special interests can lobby the government for consumer and producer taxes or subsidies and targeted l ump-sum taxes or transfers. The lobbies use only the nondistorting tra nsfers in their noncooperative equilibrium, but their intergroup compe tition for transfers turns into a prisoners' dilemma in which the gove rnment captures all the gain that is potentially available to the part ies.