Financial Looting and Controls on Resident Outflows

Bo Li, Alessandro Rebucci and Hui Tong

No 19875, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper develops a theory of preemptive controls on capital outflows by residents as a second-best tool to mitigate boom-bust cycles in domestic asset markets and prevent wealth transfers from uninformed traders to pump-and-dump speculators, or financial ``looters," as in Akerlof and Romer (1993). The model implies that when domestic financial regulation is imperfectly designed or enforced, controls on residents' outflows reduce retail investor manipulation (which we call looting), stabilize asset prices, and diminish capital flight. The paper also provides compelling evidence that supports the main implications of the model when applied to housing markets, which is particularly relevant to the institutions in developing countries. We find that deposit outflows to haven countries increase before busts in house prices, and countries with stricter controls on resident outflows experience significantly more contained deposit outflows to such destinations. The empirical analysis reveals a similar pattern for new incorporations in haven countries based on data from the Panama Papers.

Keywords: House; prices (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2025-01
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