Offshore financial centers and bank secrecy

We study the impact of an offshore financial center on the economy in the presence or absence of bank secrecy in a two-country setting with heterogeneous investors who choose where to deposit their savings. Rather than focussing on tax competition, we acknowledge that countries use two instruments to attract investors: tax rate and institu- tional infrastructure. Owing to its ability to quickly redesign its regulation environment, the small country has a comparative advantage in providing high-quality institutional in- frastructure. We show that the presence of an offshore financial center fosters competition in institutional infrastructure, which is beneficial with or without bank secrecy.