Microeconomic Implications of Remittances in an Overlapping Generations Model with Altruism and Self-Interest
IMF Working Papers, January 1, 2008
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Bibliographic details
- Authors: Tigran A. Melkonyan, David A. Grigorian
- Published: January 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868814.001
Summary
- The paper explicitly models the dynamic strategic aspects of the interaction between the migrant and the remittance-receiving relative(s), with the migrant behaving as a Stackelberg leader.
- It differs from other formalizations of remittance behavior in its treatment of the two parties' interaction to realize potential gains from exchange.
- When the migrant and the relative(s) cooperate to maximize the joint utility of the household, this leads to higher level of remittances as well as investment and hours worked by the relative(s).
- The paper uses data from Armenia to test predictions regarding implications of remittance flows on behavior of receiving households.
- The evidence suggests that the benefits of remittances might be overstated and emphasizes the importance of measuring their impact in a general- rather than a partial-equilibrium context.
Main findings (theoretical)
- Migrant acts as a Stackelberg leader in the household interaction, affecting strategic outcomes.
- Cooperation to maximize joint household utility yields:
- Higher level of remittances.
- Higher investment by the remittance-receiving relative(s).
- Higher hours worked by the remittance-receiving relative(s).
Empirical findings (Armenia)
- Consistent with model predictions, remittance-receiving households:
- Work fewer hours.
- Spend less on the education of their children.
- Save more.
- Are not leveraging their savings to borrow from the banking system to expand their business activities.
Policy implications and interpretation
- The observed patterns imply that remittances' positive effects on recipient households may be limited or conditional:
- Increased savings do not necessarily translate into increased investment in business activities via borrowing from banks.
- Reduced labor supply and lower education spending in remittance-receiving households point to potential adverse microeconomic effects.
- The results highlight the importance of assessing remittance impacts in a general-equilibrium framework rather than a partial-equilibrium context to avoid overstating benefits.