Elusive Safety: The New Geography of Capital Flows and Risk

Ester Faia, Laura Alfaro, Ruth Judson and Tim Schmidt-Eisenlohr

No 14636, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A confidential dataset with industry-level disaggregation of U.S. cross-border claims and liabilities, shows U.S. securities to be increasingly intermediated by tax-haven- financial-centers (THFC) and less regulated funds. These securities are risky, in intangible-intensive sectors, requiring higher Sharpe ratios; while the foreign-official sector mainly holds Treasuries. Facts on private securities are rationalized through a model where firms with heterogeneous default probabilities, and funded by global intermediaries, endogenously locate affiliates in THFCs. A decline in the cost of funds or in THFC’s taxes/regulation, raises profits and firms’ incentives to enter THFCs. Firms appear elusively safe, intermediaries reduce monitoring incentives and debt risk increases.

Keywords: Tax havens/financial centers; Tax avoidance; Regulatory arbitrage; Risk; Uncertainty; Heterogeneous firms; Endogenous entry; Endogenous monitoring (search for similar items in EconPapers)
JEL-codes: F2 F4 G15 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (3)

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Working Paper: Elusive Safety: The New Geography of Capital Flows and Risk (2020)
Working Paper: Elusive Safety: The New Geography of Capital Flows and Risk (2020)
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