Financial Looting and Controls on Resident Outflows
This paper develops a theory of preemptive controls on capital outflows by residents as a second-best tool to mitigate boom-bust cycles in domestic asset markets and prevent wealth transfers from uninformed traders to pump-and-dump speculators, or financial “looters,” as in Akerlof and Romer (1993). The model implies that when domestic financial regulation is imperfectly designed or enforced, controls on residents' outflows reduce retail investor manipulation (which we call looting), stabilize asset prices, and diminish capital flight. The paper also provides compelling evidence that supports the main implications of the model when applied to housing markets, which is particularly relevant to institutions in developing countries. We find that deposit outflows to haven countries increase before busts in house prices, and countries with stricter controls on resident outflows experience significantly more contained deposit outflows to such destinations. The empirical analysis reveals a similar pattern for new incorporations in haven countries based on data from the Panama Papers.
Related
More from NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
