Let us misinvoice more? The effect ofde jurecapital controls on trade misinvoicing

Abstract

This paper quantifies how the likelihood of trade misinvoicing responds to de jure capital controls by using a cross‐country panel data set covering 1995–2017. On one hand, capital controls incentivise firms to misinvoice to circumvent the controls. On the other hand, the controls discourage these firms from misinvoicing by imposing punishments. Under the assumption of no interplay of a given country's capital controls and the misinvoicing behaviours of firms from other countries, de jure capital controls imposed by importing countries on outflows are shown to increase the likelihood of trade misinvoicing by importing firms. However, capital controls imposed by exporting countries are shown to significantly decrease trade misinvoicing by exporting firms.