Elusive Safety: The New Geography of Capital Flows and Risk
48 Pages Posted: 27 Oct 2020
Date Written: 2020
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, geography of flows, profit shifting, tax avoidance, risk, safe assets, endogenous entry
JEL Classification: F100, F200
Suggested Citation: Suggested Citation