Incentive Compatible Information Transfer Between Asymmetrically Informed Principals

Abstract

In this paper we use a model of tax competition to study the role of information sharing in common agency problems. Two national governments are assumed to compete in tax schedules for the revenues and output of a multinational firm in which only one of the governments is informed about the multinational's production costs. This asymmetry of information among the governments creates two information sources for the uninformed government: the firm and the informed government. We derive and compare the equilibria from two common agency games: a firm-reporting game and a government-reporting game. Our analysis reveals three types of results. First, the asymmetric information creates new and important incentive constraints. Second, in the firm-reporting game, the informed government can influence the equilibrium incentives of the uninformed government to engage in rent extraction to the extent that the socially less desirable firm type faces efficient taxes while the socially more desirable type faces inefficient taxes. Third, despite the fact that the uninformed government is internalizing the impact of its taxes on the informed government in the government-reporting game, the most efficient equilibrium of the government-reporting game is equivalent to the efficient pooling equilibrium of the firm-reporting game.