Capital tax competition and search unemployment

Unemployment arising from job search and recruiting friction is incorporated in a tax competition model with multiple jurisdictions. Due to the matching externality, for each jurisdiction, the revenue from a job opening does not coincide with its cost. Therefore, capital taxation, which can be regarded as the export of jobs, causes positive or negative externality. When the revenue is smaller than the cost, capital taxation generates negative externality, which implies that local governments impose a too high capital tax rate and local public goods are provided in excess. It is also shown that an improvement in the efficiency of the matching process raises the capital tax levels chosen by local governments.