Working Paper: NBER ID: w12044
Authors: Andrew K. Rose; Mark M. Spiegel
Abstract: This paper analyzes the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, 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. OFC proximity is associated with a more competitive domestic banking system and greater overall financial depth.
Keywords: offshore financial centers; tax havens; money laundering; banking sector 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 |
|---|---|
| Proximity to an offshore financial center (OFC) (F39) | Pro-competitive implications for the domestic banking sector (F65) |
| Proximity to an offshore financial center (OFC) (F39) | Greater financial depth (O16) |
| Tax havens and money launderers (H26) | Offshore financial centers (OFCs) (F38) |
| Offshore financial centers (OFCs) (F38) | Competitive stimulus for local financial sectors (F65) |
| Proximity to an offshore financial center (OFC) (F39) | Ambiguous effects on overall welfare and asset distribution (D69) |
| Offshore financial centers (OFCs) (F38) | Facilitation of undesirable activities (e.g., tax evasion) (H26) |