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Tax havens or safe havens

Author

Listed:
  • Patrice Pieretti

    (CREA, University of Luxembourg)

  • Jacques-François Thisse

    (CORE, Université catholique de Louvain, CREA, Université du Luxembourg and CEPR)

  • Skerdilajda Zanaj

    (CREA, University of Luxembourg)

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.

Suggested Citation

  • Patrice Pieretti & Jacques-François Thisse & Skerdilajda Zanaj, 2011. "Tax havens or safe havens," DEM Discussion Paper Series 11-10, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:11-10
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    References listed on IDEAS

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    Cited by:

    1. Bucovetsky, S., 2014. "Honor among tax havens," Journal of Public Economics, Elsevier, vol. 110(C), pages 74-81.

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    Keywords

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    JEL classification:

    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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