Offshore Financial Centers: Parasites or Symbionts?

42 Pages Posted: 4 May 2006 Last revised: 30 Nov 2022

See all articles by Andrew Kenan Rose

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department

Multiple version iconThere are 3 versions of this paper

Date Written: February 2006

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.

Suggested Citation

Rose, Andrew Kenan and Rose, Andrew Kenan and Spiegel, Mark M., Offshore Financial Centers: Parasites or Symbionts? (February 2006). NBER Working Paper No. w12044, Available at SSRN: https://ssrn.com/abstract=885641

Andrew Kenan Rose (Contact Author)

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Mark M. Spiegel

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HOME PAGE: http://www.frbsf.org/economics/economists/mspiegel.html

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