On the Role of the Congestion Technology in Tax Competition With Unemployment

The present study examines the role of the congestion technology in a tax competition framework with productive government spending and unemployment. Considering two well‐known specifications of congestion, the congestion technology can be shown to be crucial for the analysis of efficiency in both public provision and private utilization levels of a congestible public input in the decentralized equilibrium: Under the common specification of decreasing marginal congestion, efficiency in the non‐cooperative equilibrium with capital and lump‐sum taxation depends solely on the magnitude of the production and congestion elasticities. By contrast, factor prices, such as the level of wage rigidity and corresponding employment levels are, in addition, important in determining whether both provision and utilization levels of the public input are efficient in the case of increasing marginal congestion. Numerical analysis is employed to supplement the results of the theoretical and graphical analysis and to further compare the social optimum to the decentralized equilibria.