Working Paper: CEPR ID: DP5081
Authors: Andrew K. Rose; Mark Spiegel
Abstract: This paper analyses the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behaviour in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbours, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth.
Keywords: offshore financial centers; tax havens; money laundering; financial depth; banking competitiveness
JEL Codes: F23; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| OFC proximity (Y80) | domestic banking competitiveness (F65) |
| OFC proximity (Y80) | interest rate spread (E43) |
| OFCs facilitate tax evasion (H26) | bad behavior in source countries (F22) |
| OFCs provide competitive stimulus (L29) | domestic banking sector (G21) |