Democracy, Institutions, and International Profit-Shifting

Delis, Fotios and Economidou, Claire and Hasan, Iftekhar (2022): Democracy, Institutions, and International Profit-Shifting.

Abstract

Does constitutional democratization affect profit-shifting strategies among firms? Using a global sample of multinational enterprises, we develop a subsidiary-year measure of profit-shifting and examine how this measure responds to changes in constitutional democracy and the subsequent evolution of the host country’s institutions. Our main findings show that a one-standard-deviation increase in the Polity IV democracy index yields an approximately 37% decrease in profit-shifting to other countries. Protection of property rights, contract enforcement, and superior regulatory quality emerge as the key institutional channels that define the decision to keep profits at home. Our results are robust to an instrumental variables approach and a large battery of additional robustness tests.

• Item Type: MPRA Paper
• Language: English
• Keywords: profit shifting; multinational enterprises; democracy; institutions; non parametric
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M48 - Government Policy and Regulation; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O50 - General

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