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Offshore Financial Centers: Parasites or Symbionts?

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  • Andrew K. Rose
  • Mark 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12044.

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Date of creation: Feb 2006
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Publication status: published as Rose, Andrew and Mark Spiegel. “Offshore Financial Centers: Parasites or Symbionts?” Economic Journal 117, 523 (2007): 1310-1335.
Handle: RePEc:nbr:nberwo:12044

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  1. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  2. James R. Barth & Gerard Caprio, Jr. & Ross Levine, 2002. "Bank Regulation and Supervision: What Works Best?," NBER Working Papers 9323, National Bureau of Economic Research, Inc.
  3. Huizinga, Harry & Nielsen, Soren Bo, 2003. "Withholding taxes or information exchange: the taxation of international interest flows," Journal of Public Economics, Elsevier, vol. 87(1), pages 39-72, January.
  4. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "International Investment Patterns," CEPR Discussion Papers 4499, C.E.P.R. Discussion Papers.
  6. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank.
  7. Luca Errico & Alberto Musalem Borrero, 1999. "Offshore Banking," IMF Working Papers 99/5, International Monetary Fund.
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