Offshore Financial Centres: Parasites or Symbionts?

Andrew Rose () and Mark M Spiegel ()

No 5081, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behaviour in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbours, 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. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth.

Keywords: asset; competitive; cross-section; data; empirical; haven; money; tax; theory (search for similar items in EconPapers)
JEL-codes: F23 F36 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-fmk
Date: Written
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Related works:
Working Paper: Offshore Financial Centers: Parasites or Symbionts? (2006)
Working Paper: Offshore financial centers: parasites or symbionts? (2005)
Journal Article: Offshore Financial Centres: Parasites or Symbionts? (2007)
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