Trade finance, bank mail-outs and profit taxation in an interconnected world

Abstract

Countries are increasingly linked internationally. The three models developed in this thesis shed light on how firms and governments respond to the increasing interconnectedness of the world economy, analyzing profit taxation, trade finance and government intervention in the event of a contagious banking crisis. They can help understand in how far integration is beneficial or harmful and what optimal policies might be. My first paper, which is joint work with Sebastian Krautheim, is based on the finding that larger firms are more likely to use tax haven operations to exploit international tax differences. We study a tax game between a large country and a tax haven modeling heterogeneous monopolistic firms, which can shift profits abroad. We show that a higher degree of firm heterogeneity increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher out flows of its tax base and thus decreases its equilibrium tax revenue. Similar effects hold for a higher substitutability across varieties. My second paper takes a first step towards building a theory of trade finance. Cross border transactions are conducted using different payment contracts, the usage of which varies across countries and over time. I build a model that can explain this observation and study its implications for international trade. In the model exporters switch between payment contracts optimally, trading of differences in enforcement and efficiency between financial markets in different countries. I find that the ability of firms to switch contracts is key to understand how trade flows respond to variations in financial conditions. Numerical experiments with a two-country version of the model suggest that limiting the choice between payment contracts reduces traded quantities by up to 60 percent. The third paper, which is joint work with Friederike Niepmann, analyzes ex-post intervention by governments in response to international banking crises under different cooperation regimes. Financial institutions are increasingly linked internationally and engaged in cross-border operations. As a result, financial crises and potential bail-outs by governments have important international implications. Extending Allen and Gale (2000) we provide a model of international contagion allowing for bank bail-outs financed by distortionary taxes. We single out inefficiencies due to spillovers, free-riding and limited burden-sharing. When countries are of equal size, an increase in cross-border deposit holdings improves, in general, the non-cooperative outcome. For efficient crisis management, ex-ante fiscal burden sharing is essential as ex-post contracts between governments do not achieve the same global welfare.