Working Paper: CEPR ID: DP8570
Authors: Patrice Pieretti; Jacques-François Thisse; Skerdilajda Zanaj
Abstract: Our aim is to explain how a small country can be viable as an international banking center (IBC). We build a model in which mobile investors choose between two banking centers located respectively in a small country and in a large country. These countries compete in two instruments, taxation and institutional infrastructure. It follows that an IBC can be a tax haven, a safe haven, or both. A small country that hosts an IBC is a safe haven when it is able to provide a high level of institutional infrastructure, whereas it chooses to be a tax haven when it cannot be competitive in institutional infrastructure. Even in this last case, an IBC need not be as bad as claimed in the general press because its presence fosters institutional competition across countries, which is ultimately beneficial to all investors.
Keywords: International Banking Centers; Portfolio Investments; Institutional Infrastructure; Competition; Tax Competition
JEL Codes: H40; H54; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional quality (I24) | Attractiveness of the banking center (G21) |
| Inability to compete on institutional quality (D29) | Resorting to being a tax haven (H26) |
| Presence of an IBC (Y20) | Institutional competition across countries (F29) |
| Tax havens (H26) | Regulatory environment for investors (G18) |
| Tax rates + Institutional quality (H29) | Viability as an IBC (G33) |