NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Offshore Financial Centers: Parasites or Symbionts?

Andrew K. Rose, Mark Spiegel

NBER Working Paper No. 12044
Issued in February 2006
NBER Program(s):   IFM   ME   PR

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.

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Document Object Identifier (DOI): 10.3386/w12044

Published: Rose, Andrew and Mark Spiegel. “Offshore Financial Centers: Parasites or Symbionts?” Economic Journal 117, 523 (2007): 1310-1335.

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