by Martin Paldam
Start page: 377 - End page: 396
Keywords: Capital flight; offshore finance
Jel code: E44; F33; F65
Eleven safe havens exist in Europe providing offshore banking and low taxes. Ten of these states are very small while Switzerland is moderately small. All 11countries are richer than their large neighbors. It is shown that causality is from small to safe haven towealth, and that theoretically equilibriums are likely to exist where a certain regulation is substantially lower in a small country than in its big neighbor. This generates a large capital inflow to the safe havens. The pool of funds that may reach the safe havens is shown to be huge. It is far in excess of the absorptive capacity of the safe havens, but it still explains, why they are rich. Microstates offer a veil of anonymity to funds passing through, and Switzerland offers safe storage of funds.