The Role of Offshore Financial Centers in Regulatory Competition

Abstract:     
Offshore financial centers are criticized for everything from facilitating money laundering to lax regulation. Yet these jurisdictions play an important positive role in the international legal system that is rarely recognized by providing a different type of competitor in the market for law. Offshore financial centers like the Cayman Islands and the Isle of Man exert an important discipline on democratically-constrained onshore jurisdictions by allowing firms and individuals to route around rent-seeking legislation and by innovating in the creation of legal rules to lower transactions costs. The paper discusses examples of this including captive insurance entities and foreign finance subsidiaries. Even more importantly, offshore financial centers are well-positioned to discipline autocratic regimes, by undermining autocrats' efforts to prevent alternative centers of power from arising. Fully understanding how offshore finance centers affect the global competition among states for economic activity is crucial for addressing current policy debates over measures like the European Union's Savings Directive and the proposed U.S. Stop Tax Haven Abuse Act.

Number of Pages in PDF File: 74

working papers series