MEMORANDUM. The Link between International Remittances and Private Interhoushold Transfers. No 14/2012. Berhe Mekonnen Beyene

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1 MEMORANDUM No 14/2012 The Lnk between Internatonal Remttances an Prvate Interhoushol Transfers Berhe Mekonnen Beyene ISSN: Department of Economcs Unversty of Oslo

2 Ths seres s publshe by the Unversty of Oslo Department of Economcs P. O.Box 1095 Blnern N-0317 OSLO Norway Telephone: Fax: Internet: e-mal: econep@econ.uo.no In co-operaton wth The Frsch Centre for Economc Research Gaustaalleén 21 N-0371 OSLO Norway Telephone: Fax: Internet: e-mal: frsch@frsch.uo.no Last 10 Memorana No 13/12 No 12/12 No 11/12 No 10/12 No 09/12 No 08/12 No 07/12 No 06/12 No 05/12 No 04/12 Berhe Mekonnen Beyene The Effects of Internatonal Remttances on Poverty an Inequalty n Ethopa Olav Bjerkholt Økonom og økonomer I UOs hstore: Professorkonkurransen Erk Børn An Econometrc Market Moel of Captal an Investment Inspre by Haavelmo Jens Frerk Baumgarten Skogstrøm Entrepreneural School Dropouts: A Moel on Sgnallng, Eucaton an Entrepreneurshp Fnn R. Førsun Measurng Effcency n the Publc Sector Tapan Mtra, Ger B. Ashem, Wolfgang Buchholz an Cees Wthagen Characterzng the Sustanablty Problem n an Exhaustble Resource Moel Torbjørn Hanson Effcency an Prouctvty n the Operatonal Unts of the Arme Forces Sheetal K. Chan The Relevance of Haavelmo s Macroeconomc Theorzng for Contemporary Polcy Makng Tone Ogneal In the Shaow of the Labour Market Mchael Hoel Secon-best Clmate Polcy Prevous ssues of the memo-seres are avalable n a PDF format at:

3 The Lnk between Internatonal Remttances an Prvate Interhousehol Transfers Berhe M. Beyene March, 2012 Abstract The paper stues the lnk between nternatonal remttances an nterhousehol transfers. Usng a smple nsurance moel, t s shown that househols transfer a large fracton of the remttance they receve from relatves abroa to other househols. The effect of remttances on nterhousehol transfers s emprcally nvestgate usng an urban househol survey from Ethopa. Consstent wth the precton of the moel, remttance has a strong postve effect on the amount of transfer gven, controllng for total househol ncome an other covarates. Key wors: nternatonal remttances, nterhousehol transfers, mutual nsurance, Ethopa JEL Classfcaton: D-19, F-24, I-30, R-20 Unversty of Oslo, e-mal: b.m.beyene@econ.uo.no. I thank Halvor Mehlum, Kalle Moene an Heonjae Song for comments an suggestons. Whle carryng out ths research I have been assocate wth the Centre of Equalty, Socal Organzaton, an Performance (ESOP) at the epartment of Economcs, at the Unversty of Oslo. ESOP s supporte by the Research Councl of Norway 1

4 I. Introucton Research on the mpact of nternatonal remttances on the recevng countres has been growng recently. Although the etale fnngs ffer from stuy to stuy, some patterns are observe. Remttances usually have sgnfcant welfare mprovng effect on the recpent househols because they consttute large fractons of ther ncomes. There are also some evences that remttance money s nveste on physcal an human captal. But remttances can also have negatve effect on labor force partcpaton. They ten to reuce poverty whle ther effect on nequalty s unclear. 1 The focus has so far been on the recpent househols. 2 However, to fully unerstan the effect of remttances on the welfare of househols n the recevng countres, t s mportant to take nto account ther mpact on non-recpent househols. There are many ways nonrecpent househols coul be affecte an one channel s through prvate nterhousehol transfers. Stues on the welfare mpact of remttances mplctly assume that remttances are use only by the recevng househols. But t s possble that remttances are share wth nonrecpent househols. Whle economsts have stue prvate transfers n evelope countres for a long pero of tme, there s also a growng lterature on prvate transfers n evelopng countres ue to the better avalablty of househol ata (for a survey on prvate transfers see Laferrere an Wolff, 2006 an Latner, 1997). Despte the close relatonshp between the two topcs, to my knowlege, there has been no stuy focusng on how remttances affect prvate transfers. Theoretcally, t s well establshe that the amount of transfer ncreases wth the onor s ncome an ecreases wth the recpent s ncome when transfer s motvate by altrusm. Insurance motve also leas to smlar prectons. There are ample evences that support such theoretcal prectons (for example, Cox, 1987; Cox an Rans, 1985; Kazanga, 2006). The fnngs from the lterature on prvate transfers have an mportant nsght on the possble mpact of remttances on nterhousehol transfers. If remttance recpents are on the onors se, remttances, by ncreasng the onors ncome, wll lea to more transfers. 3 Remttances can also have atonal effect on prvate transfers other than the general ncome effect. A case n pont s where househols, ue to lack of well functonng nsurance 1 For a survey on the effect of remttances refer Aams (2006), Aams (2011), e Haas (2007), an Taylor (1999). 2 A notable excepton s the stuy by Yang an Martnez (2006) that tre to aress the effect of remttances on non-remttance recevng househols n Phlppnes. 3 But f remttances manly go to the transfer recpents, they may have a crowng out effect smlar to government transfers. 2

5 markets, have an nformal norm of sharng ncome. 4 Snce ncomes from other sources are usually ffcult to observe, househols are more lkely to epen on remttances to nsure each other. If remttances are share wth other househols, househols who o not have mgrant members abroa also beneft an that wll boost the welfare mprovng mpact of remttances. It can also make remttances more equalzng (or less unequalzng) an more poverty reucng than they woul be n the absence of nterhousehol transfers. Ths paper stues the egree to whch nternatonal remttances are share wth other househols. Usng a smple nsurance moel, I show that remttance money s equally share wth non-remttance recevng househols. The extent to whch remttances are transferre to other househols s nvestgate emprcally usng an urban househol survey from Ethopa. The rest of the paper s organze as follows. In secton two the theoretcal moel s presente. In secton three the econometrc metho s ealt wth, whle ata an summary statstcs are presente n secton four. The emprcal result s gven n secton fve an the last secton conclues. II. Theory There coul be fferent motves for prvate transfers an the one that s most scusse n the lterature s altrusm. Uner altrusm, people make transfers because they care about the wellbeng of the recpents. Altrustcally motvate transfers are typcally common among close famly members, for example, from parents to chlren or vce versa. Another common reason for prvate transfers s nsurance or rsk sharng motve. Lke many markets, nsurance markets are mperfect or non-exstent n evelopng countres. Thus, househols usually rely on nformal norms of ncome sharng to smooth ther consumpton. In ths paper two types of prvate transfers are consere. The frst one s between close famly members. More specfcally, t s money sent by mgrants to ther famles back home n the form of remttance. It s assume that such transfers are motvate by altrusm,.e., mgrants care about ther famles an hence remt part of ther ncome. I assume that mgrants o not care about other househols (other than ther famles). The secon type of transfer occurs among stant relatves or communty members an s assume to be motvate by a norm of mutual nsurance. They enter nto an agreement to 4 For a scusson on socal norms refer Elster (1989). Another reason why remttances coul be more transferable s recprocty when someone s nce for you, you feel a moral oblgaton to be nce for others n return (Kolm, 2006). Remttance ncome may also be seen as a wnfall gan an hence can be spent/transferre wth less pan (Chrstaensen an Pan, 2010). 3

6 smooth ther consumpton by sharng ther ncome. If some househols face negatve ncome shock, other members of the communty help them by transferrng part of ther ncome. Smlarly, wnfall gans are also share wth the other househols. I.e., transfers serve as nsurance not only aganst ba luck but also aganst lack of goo luck. Apparently, nformal nsurance norms also have problems. A common problem, especally n urban areas, s asymmetrc nformaton about ncome. The vast majorty of urban wellers n evelopng countres work n the nformal sector wth fferent an rregular ncome streams whch make t ffcult for other househols to observe (Alv an Denr, 2009a). Ths weakens the potental of nformal sharng norms. But some househols also get remttance from ther relatves abroa whch, unlke omestc ncome, s usually regular an farly observable. Whether a househol has a mgrant member abroa or not s often a publc knowlege an usually mgrants sen money to ther famles. In the moel that follows, househols can only share remttance ncome to smooth ther consumpton. To fx ea, I assume that househols have the same ncome from omestc sources. But some have mgrant famly members abroa an hence receve remttance whle others o not. Those who receve remttance nsure the others by transferrng part of the remttance they receve. I assume there are n entcal househols each wth two househol members; a father an a son. The father oes not mgrate an earns y h at home. The son ether mgrates abroa wth a probablty or stays at home wth a probablty1. Mgraton s costless. When the son mgrates, he earns y m (where y m > y h ) an sens remttance r to hs famly. If he oes not mgrate, he forms hs own famly an earns the same ncome as hs father. Those househols, who receve remttance, transfer part of what they receve to other househols. The transfer can be consere as a communty tax leve on remttance ncome. The transferre money s share equally by the non-recpents. Parents are selfsh an hence the sons who o not mgrate are not nclue n the sharng. The fractons of remttance recevng an nonrecevng househols are gven by an 1 respectvely. Denotng the transfer rate by t, each non-recpent househol wll then receve a transfer of: tr 1 (1) The communty eces on the optmal t. Before scussng how the communty eces on t, I frst present the mgrant s ecson on r an how t s affecte by changes n t. 4

7 The Mgrant s Decson to Remt The mgrant cares about the welfare of hs famly n aton to hs own welfare. Hence, he sens remttance to hs famly. More specfcally, he rves utlty from hs own consumpton, c m (whose prce s assume to be unty for smplcty) an the ncrement n hs famly s consumpton as a result of the remttance he sens. 5 The amount of remttance hs famly retans after transferrng tr to other househols s gven by (1-t)r an can be terme as the sposable remttance. The atonal consumpton of the famly, whch I enote as, wll then be the sposable remttance expresse n terms of purchasng power. Defnng the real exchange rate as e, the atonal consumpton wll be gven as: = (1-t)re (2) Equaton (2) shows that f the mgrant wants hs famly to have an atonal consumpton of, he has to sen a total remttance of: r 1 1 t e p ; where p 1 1 t e (3) p measures the amount of money the mgrant has to sen for each atonal unt of consumpton by hs famly an hence can be consere as the prce of. Snce the prce of c m s one by assumpton, CES utlty functon gven as follows: p s also the relatve prce of to c m. I assume the mgrant has a U cm, cm ; 0, 0< 1 (4) where σ s the elastcty of substtuton between c m an, an α s the weght the mgrant attaches to relatve to c m. α can be consere as a measure of the mgrant s egree of care(altrusm) towars hs famly. If α s equal to one, he cares about hs famly the same way as he cares for hmself. Otherwse, he cares more for hmself. He maxmzes hs utlty subject to hs buget constran whch s: cm p ym (5) 5 Such specfcaton resembles the separable earnngs-bequest moel of Behrman et al (1982) where chl s earnng an bequest enter the parent s utlty functon separately. 5

8 Maxmzng (4) subject to (5) yels the followng frst orer conton: 1 p 1 cm (6) The left han se of equaton (6) s the rato of the two margnal utltes whch s known as the margnal rate of substtuton whle the rght se s the prce rato. Solvng for cm from equaton (6) gves: c m p an substtutng c m n the buget constrant an solvng for the optmal quanttes, I get: y y p p p m m, cm 1 1 (7) Notng that p 1 1 t e, t s easy to see from equaton (7) that atonal consumpton for the famly ncreases wth the real exchange rate an ecreases as the transfer rate ncreases. 6 Wthout loss of generalty, I assume the real exchange rate to be one. Then, the atonal consumpton wll be the same as the sposable remttance,.e., = (1-t)r an p 1. 1 t The mgrant s eman for can be characterze as follows: 1 p ym f ym, p ; f 0, f ym p p p p p (8) an the percentage change n ue to a percentage change n p whch can be terme as the elastcty of sposable remttance wll be: whch after smplfyng becomes: f 1 p m p p 2 p 2 m p y p p y (9) 6 When the transfer rate ncreases, the famly s consumpton becomes more expensve an hence the mgrant cuts ts quantty. But when the real exchange rate ncreases, famly consumpton becomes cheaper an the mgrant wll eman more of t. 6

9 p s s p where s s the expenture shares of gven by: (10) s p p = y 1 m 1 1 p an, t s easy to see that: 1 f 1 1 f 1 1 f 1 (11) The elastcty of remttance measures how responsve the mgrant s to p whch n turn epens on t. Whle the sposable remttance ecreases as the transfer rate ncreases, the effect of change n the transfer rate on the gross remttance s not clear. Increase n the transfer rate has two opposng effects on the remttng behavor of the mgrant. On the one han, he wants to cut remttance as the transfer rate ncreases because hs famly s atonal consumpton becomes more expensve relatve to hs own consumpton. But hgher transfer rate also leaves hs famly wth less consumpton an the mgrant wants to compensate them by remttng more. Hs ultmate response wll then epen on the relatve strength of the two effects. If the elastcty of sposable remttance s equal to one, any change n the prce of the sposable remttance s matche by a proportonal change n the amount of the sposable remttance. Thus, the gross remttance wll be the same regarless of the prce level whch mples that the total remttance oes not epen on the transfer rate. I.e., the two opposng effects of change n the transfer rate whch are scusse above are equally strong an they cancel out. But when the elastcty of sposable remttance s less than one, gross remttance ncreases wth the transfer rate because the percentage fall n the sposable remttance s smaller than the percentage rse n prce. In other wors, the compensatng effect of a hgher transfer rate omnates the prce effect an hence the mgrant remts more as the transfer rate ncreases. If the elastcty of sposable remttance s greater than one, on the other han, gross remttance ecreases as the transfer rate ncreases. 7

10 The Optmal Transfer Rate It s assume that the communty back home has a norm of sharng remttance money,.e., househols transfer part of the remttance they receve from relatves abroa to other househols. The transfer rate s set as f there s a socal planner whose objectve s to maxmze socal welfare. Assumng that househols have the same concave utlty functon, the socal planner chooses t so that the expecte utlty of a representatve househol s maxmze takng nto account the mgrant s response to changes n t. If the househol oes not receve remttance from abroa, consumpton (assumng prce at home s also one) s gven by the sum of home ncome plus the transfer he gets from those who receve remttance,.e., t c0 yh tr yh 1 1 1t An when he receves remttance, consumpton wll be home ncome plus the sposable remttance,.e., c1 yh. The socal planner s problem wll then be: t max V (1 ) U yh U yh t 1 1t subject to: c c 1 0 (12) The conton c1 c0 s an ncentve compatblty constrant an states that havng a mgrant member abroa shoul at least be as goo as not havng a mgrant member. Otherwse, t wll not be n the nterest of any househol to sen ts famly member abroa n the frst place. Notng that f y, p an p m V t 1 (1 ) t 1 1 t 1 1 t + (1 ) 1, the frst orer conton wll be: 1 t ' U yh 2 t t 1 1 t t p 1 t ' U yh U y ' + h 0 2 p 1 t 1 2 8

11 whch after smplfyng an usng the efnton of f 2 from equaton (8) becomes: where V ' ' t ' 2 U0 U0 f2 U1 f2 0 t 1 t 1 t ' ' t ' ' U0 U yh an U1 U yh 1 1t whch can also be put as: V f f t 1 t 1 t an usng the efnton of from equaton (9) I get: ' ' 2 ' 2 2 U0 U0t U1 0 V t 1t U ' ' ' 0 tu t U1 0 or smply, the frst orer conton can be gven as: ' ' ' U tu 1t U 0 whch after rearrangng terms becomes: ' ' ' ' U U t U U (13) The expecte utlty of the representatve househol wll be maxmze when equaton (13) hols. But f equaton (13) oes not hol, there s room to ncrease the expecte utlty by changng t. More specfcally, f U ' U ' tu ' U ', the margnal expecte utlty s postve an the expecte utlty of the representatve househol can be ncrease by ncreasng t. If U ' U ' tu ' U ', on the other han, the margnal expecte utlty s negatve an t shoul be ecrease. Depenng on the value of the elastcty of sposable remttance there wll be three cases whch are scusse below. Case 1: 1 The frst case s where the elastcty of sposable remttance s equal to one whch mples that total remttance s the same regarless of the transfer rate. I.e., the remttng behavor of the mgrant s not affecte by the transfer rate. To solve for the optmal transfer rate, I replace 1n equaton 13 an get: 9

12 ' ' tu0 U1 1 0 whch uner the ncentve compatblty constrant has only one soluton; mples: t c 0 c 1 y h yh 1 1t U U whch ' ' 0 1 an solvng for t gves the followng result: t * 1 (14) When the elastcty of sposable remttance s one, the optmal transfer rate s chosen such that the beneft from mgraton, whch s remttance, s share equally an hence every househol consumes the same amount;.e., remttances o not create nequalty. It also means househols consume the same amount urng ba an goo tmes; there s complete nsurance. Ths s because there s no effcency cost assocate wth nsurance when total remttance s fxe. Thus, the communty cares only about nsurance whch mples that the beneft from mgraton shoul be share equally. Case 2: 1 To see what the optmal t wll be when 1, I start wth t 1 whch s the optmal transfer rate when the elastcty of sposable remttance s equal to one. When t 1, the left han se of equaton (13) becomes: U U (1 ) U U U U ; because t 1 U U ' ' ' ' ' ' ' ' an t s easy to see that U U whch mples that the margnal expecte utlty of the ' ' representatve househol s postve. Thus, the expecte utlty of the representatve househol can be ncrease by ncreasng t. I.e., t * 1. The reason s, when the elastcty of sposable remttance s less than one, remttance ncreases wth t an the communty has ncentve to trae-off nsurance for effcency by ncreasng t. But the ncentve compatblty constrant n equaton (12) mples that t 1. Therefore, the optmal t wll be: t * 1 (15) Lke n the frst case, remttances are equally share an the transfer rate s gven by the fracton of non-remttance recevng househols. But the total remttance amount s larger 10

13 than the amount uner no transfers (.e., t = 0) mplyng that transfer has an atonal beneft (from the communty s pont of vew) on top of smoothng consumpton. It s as f the mgrant rewars the norm of sharng by senng more remttance. Case 3: 1 Followng smlar approach use n Case 2 above, t s easy to show that at t 1, ' ' ' ' ' ' U U t U U U U. Ths mples that t s too bg an shoul be reuce. Thus, the optmal t wll be: (16) * 0 t 1 When the elastcty of sposable remttance s greater than one, remttance can be ncrease by ecreasng t an ths contnues as far as the beneft from ong so s postve. But snce the communty also cares about nsurance, t nee not go all the way to zero. 7 If a postve t s chosen, total remttance wll be smaller than the case wth no transfers. I.e., though transfer mproves welfare by smoothng consumpton, t comes at a cost. The fact that the optmal transfer rate s less than 1 mples that there s no equal sharng or complete nsurance unlke n the frst two cases. Remttances create nequalty, but the level of nequalty wll be less than the case wth no transfers. The above three cases show how the elastcty of sposable remttance affects the optmal transfer rate. Snce the mgrant cares only about hs famly, any transfer to other househols makes hs famly s consumpton more expensve. Increase n the transfer rate has smlar effect on the mgrant as ncrease n the transacton cost of senng remttance (whch s mplctly assume to be zero n ths moel). As senng remttance becomes more expensve, the mgrant may keep hs total remttance expenture (nclung transacton cost) constant n whch case the buren of the atonal cost falls on hs famly entrely. He may, as well, share the buren by ncreasng hs total remttance spenng. But t s unlkely for hm to cut hs total spenng an to avo such unrealstc result I make the followng assumpton about the elastcty of substtuton between the mgrant s own consumpton an the atonal consumpton by hs famly. 7 For a suffcently large (n absolute terms) Ԑ, the optmal transfer rate wll be zero. From equaton (13) t s V U easy to see that 0 at t=0 when t U ' 0 ' 1 whch mples that the transfer rate that satsfes the frst orer conton s a negatve one. Thus, we wll have a corner soluton at t * =0. 11

14 Assumpton 1: σ 1 Uner the above assumpton, t follows from equaton (11) that the elastcty of sposable remttance s less than or equal to one whch as scusse n cases 1 an 2 above leas to the followng proposton. Proposton 1: When the elastcty of substtuton between the mgrant s consumpton an hs famly s atonal consumpton s less than or equal to one, remttance money wll be equally share between remttance recevng an non-recevng househols whch mples that the optmal transfer rate wll be gven by the fracton of non-remttance recevng househols. When the elastcty of substtuton s less than or equal to one, the moel gves the stark precton that remttances are share equally among all househols. But n realty remttance recpents wll resst equal sharng. Beses, the assumpton that mgraton s costless oes not hol. As a result, the transfer rate wll be less than what the moel prects. One shoul, nonetheless, expect that a large share of remttance ncome wll be transferre to other househols. Remttance money s also expecte to be more transferrable than ncome from other sources. Ths s teste n the emprcal part where total ncome an other househol characterstcs are controlle for. Uner the assumpton that the elastcty of substtuton between the mgrant s own consumpton an hs famly s atonal consumpton s less than or equal to one, the moel has also another testable mplcaton. As hghlghte above, the total remttance flow oes not ecrease (though the sposable remttance ecreases) as the transfer rate ncreases. More specfcally, total remttance may ether ncrease or reman constant as the transfer rate ncreases epenng on whether the elastcty of substtuton s less than or equal to one. Ths can be teste f a rcher ata set s avalable wth exogenous varaton n sharng norms. III. Econometrc Metho Probablty of Gvng Transfer The man objectve of the paper s to nvestgate the extent to whch remttances are share wth non-recpent househols. In other wors, I am ntereste n stuyng the effect of remttance on the amount of transfer gven to other househols whch requres runnng a regresson of transfer amount on remttance. But t s also nterestng to stuy the effect of 12

15 remttance on the lkelhoo of gvng transfer. I efne an unobservable latent varable D *, whch measures the propensty to gve transfers, as follows: where an D R X (17) * R s the amount of remttance receve, X s a vector of ncome an other covarates, s a normally strbute error term. The ecson varable whch shows whether transfer s gven or not can be put as: * 1 f D 0 D 0 otherwse The probablty of gvng transfer wll be: D 0 1R 2X Pr R X Pr 1 Pr (18) The coeffcents are estmate usng the Probt metho an ˆ 1 shows the effect of remttance on the probablty of gvng transfer an s expecte to be postve. Amount of Transfer Gven Now I turn to the man focus of the paper, whch s assessng the effect of remttance on transfer amount. The amount of transfer gven can be wrtten as: where T 0 1R 2 X ; ~ N 0, 2 (19) R an X are efne the same way as n equaton (17). OLS can be use to estmate equaton (19), but the fact that the amount of transfer s zero for many of the househols mght lea to base estmates. To account for the censorng of transfers at zero, the followng equaton s estmate usng the Tobt moel. / / 0 R X E / T 0 E T T E R X T (20) Net Transfer Gven In the transfers lterature, t s common to use net transfer as the epenent varable nstea of gross transfer, though the choce s harly motvate by theoretcal or practcal justfcatons (for example, Cox et al, 1998; Cox et al, 2004; Kazanga, 2006). Alv an Denr 13

16 (2009b:1339) use net transfer as an alternatve to gross transfer an argue that Because nformal transfers may be recprocal, carre out wthn a well-connecte group of famly members an frens, t may not be unusual for househols to thnk n terms of net-status rather than just the gross amounts. Whether the choce of net transfer over gross transfer s convncng or not, t makes the result comparable wth other stues. It s also worth notng that most emprcal works focus on transfers receve ue to the huge emphass on testng whether transfer recepts ecrease wth the recpents ncome whch s taken as an evence for the presence of a crowng out effect of publc transfers. But wth net transfers, the fference between recevng an gvng s not mportant as both negatve an postve net transfers are nclue. Though ths paper (unlke most other stues) focuses on transfers gven, usng net transfers makes the result comparable wth the exstng lterature. Therefore, as an alternatve to gross transfer, net transfer whch s efne as transfer gven mnus transfer receve s use as a epenent varable. Remttance, as before, s expecte to have a postve effect on net transfer. Net transfer can be wrtten as: T a0 a1r a2 X v ; v ~ N 0, 2 (21) Usng OLS wll lea to smlar problem scusse n connecton wth gross transfer because the value of net transfer s zero for many househols. To account for the specal type of censorng, I use the frcton moel propose by Rosset (1959), an apple by Kazanga (2006) an Song (2009) n smlar contexts. The latent net transfer amount follows: an the actual net transfer amount s: * T s efne as T * 2 b0 b1 R b2 X e ; e ~ N 0, (22) T * * T f T 1 * 0 f 1 T 2 * * T f T 2 (23) 14

17 where 1 an 2 are respectvely the mnmum (n absolute terms) negatve an postve net transfer values between whch net transfer s zero. 8 The Moel s estmate usng maxmum lkelhoo estmaton metho outlne by Maala (1983). Though 1 an 2 are assume to be unobservable parameters n the orgnal Rosset moel, I assume them as fxe known values smlar to Song (2009). IV. Data an Summary Statstcs Data The ata for the emprcal part comes from the 2004 Ethopan Urban Soco-economc Survey (EUSS) collecte by As Ababa Unversty n collaboraton wth Gothenburg Unversty. It has etale nformaton about ncome an other househol characterstcs. Income sources are ve nto four major groups namely wage/salary employment, busness/own account, female/chlren busness, an transfers. Transfers are further saggregate nto nternatonal remttances, government transfers (lke penson an a), an prvate nterhousehol transfers. Househols were also aske f they transferre money or goos to other househols wthn 12 months before the ntervew. For those who gave transfers the amounts were also reporte. The sample nclues 1424 househols rawn from As Ababa an sx other major ctes. The sample was strbute to the ctes accorng to ther populaton sze an fnally househols were rawn ranomly. After roppng observatons wth mssng nformaton on ncome, the sample s reuce own to 1330 househols of whch, 136(10%) gave an 208 (16%) receve transfers. The total number of househols who partcpate n transfers s 315 (24%) an 29 (2%) househols partcpate n both gvng an recevng. The summary of transfers by remttance status s reporte n table 1. 8 Uner the same sprt as the orgnal frcton moel, Kazanga (2006) an Song (2009) assume that 1 an 2 are transacton costs assocate wth partcpaton n transfers. I.e., househols wll partcpate n transfer only f ther latent transfer value s greater than the transacton cost. Accorngly, the actual net transfer wll be T * * f T < 1, T 1 * * f T > 2, an zero otherwse. 2 15

18 Table 1. Summary of transfers by remttance status Remttance recpents Non-remttance recpents All househols Number of househols (% n parentheses) Transfer onors 34(17.3) 102(9) 136(10.2) Transfer recpents 16(8.1) 192(17) 208(15.6) Donors/Recpents 45(22.8) 270(23.8) 315(23.7) Non partcpants 152(77.2) 863(76.2) 1015(76.3) All househols 197(100) 1133(100) 1330(100) Amount of Transfers Transfers gven 266(624) 60.41(98) (332) Transfers receve (170) (262) (256) Net transfers gven 153(563) -74(244) -41(319) Note: Transfer amounts are monthly mean values n Brr (the exchange rate was $ 8.5 Brr n 2004) wth stanar evatons gven n parentheses. Though transfers were reporte annually they are converte nto a monthly amount. In the frst panel of table 1, the strbuton of househols by transfer status s gven for both remttance recevng an non-recevng househols. Percentages are prove n parentheses. Out of the 197 househols who receve remttance, 17% gave an 8% receve transfers. Of the non-remttance recpents, 9% are onors an 17% are recpents. Ths ncates that remttance recpents are more lkely to be transfer onors an less lkely to be transfer recpents compare wth non-remttance recpents. In the lower panel of the table, the summary of transfer amount by remttance status (contonal on partcpaton) s reporte. The average monthly transfer gven s 266 Brr for the remttance recevng group whle t s 60 Brr for the non-recpents. For the whole sample t s 112 Brr. Ths shows that, not only a bgger fracton of remttance recpents gve transfers, but they also transfer larger amount on average compare wth the non-remttance recevng group. The fference n the amount of transfer receve between the two groups s neglgble an the average monthly amount for the whole sample s 135 Brr. I.e., though remttance recpents are less lkely to receve transfers compare wth non-remttance recpents, when they o, they receve the same amount on average. The average monthly net transfer gven s postve for remttance recpents whle t s negatve for non-remttance recpents. Overall, there are more transfer recpents than onors an the amount receve s also bgger on average than the amount gven. Ths mght suggest that transfers gven were unerreporte relatve to transfers receve. If there s uner-reportng, t woul normally be expecte to go the other way roun as househols, n general, ten to uner report ther 16

19 ncomes an over report ther expentures. But the atttue towars transfers mght be fferent. Another reason for the screpancy mght be the way the questons about transfers were aske. Whle there were etale questons about recepts, there was just one queston about transfers gven. Such screpancy s not, however, uncommon n the lterature (see for example Cox et al, 2004 n Phlppnes an Daves, 2010 n Malaw). Explanatory Varables: Descrpton an Summary Statstcs The man objectve of the paper s to nvestgate the extent to whch remttances are share wth non-recpent househols. Therefore, I nclue the amount of remttance receve by the househol as the man explanatory varable. To entfy the separate effect of remttance, I controlle for total ncome of the househol nclung remttance. The coeffcent of total ncome captures the general ncome effect whch s expecte to be postve because socety normally emans more transfer from househols wth larger ncome. But ue to the problem of observablty, the effect s expecte to be weaker compare wth that of remttance. The remttance varable measures the atonal effect on top of the general ncome effect; the coeffcent of remttance represents the effect of a unt change n remttance keepng total ncome constant. I nclue penson ncome as a regressor to check f t has a separate effect on transfers. 9 Other househol characterstcs are also controlle for. A host of househol hea characterstcs are nclue as proxes for economc an socal contons of the househol. Age, gener, eucaton, employment, an health conton of the househol hea are nclue. Age of the househol s lkely to be relate wth earnng capacty whch can nfluence transfer an to capture a possble non-lnear effect, age square s ae. Eucaton of the househol hea s assocate wth hgher an more stable ncome potental an hence s expecte to affect transfers postvely. Havng a female househol hea s usually assocate wth economc vulnerablty an s lkely to have a negatve effect on transfers. Smlarly, househols who have unemploye, sck, or sable heas are expecte to transfer smaller amounts. 9 Informaton about remttance an other ncome varables for the househols who receve the transfers s not avalable an hence coul not be nclue n the regresson. Gven that ncomes of onors an recpents are lkely to be correlate; ths mght lea to omtte varable bas. Stues that attempte to entfy ths bas foun that there s small an postve bas on the effect of recpents ncome on transfers receve (see for example Cox et al, 1998 n Peru; Kazanga, 2006 n Burkna Faso an Mtrut an Norblom, 2010 n Romana). Ths suggests that the bas on the effect of ncome on transfers gven wll be small an negatve. The correlaton between remttances receve by onors an recpents s expecte to be postve smlar to the correlaton for total ncomes whch mples, f there s a bas, t wll be ownwars. 17

20 In aton, househol sze an the number of employe househol members are nclue. Househol sze s lkely to have negatve effect because larger househols have bgger nees an hence they wll be expecte to transfer less, other thngs beng constant. The number of employe househol members s lkely to have a postve effect because t represents hgher an more versfe ncome generatng capacty. To control for famly hstory, ummy for househols who mgrate to ther current locaton from another place s nclue. Another ummy s also nclue for those househols who have new househol members who came from another place (wthn Ethopa). Mgrant househols are lkely to keep ther socal te wth people at the place of orgn whch mght lea to fferent transfer norm. 10 A ummy varable s nclue for househols who lve n As Ababa. Snce As Ababa s by far bgger than the other ctes, socal tes may be weaker whch n turn leas to weaker transfer norms. A summary of the explanatory varables by transfer status s reporte n table 2 whle ther efntons are gven n table 5 n the appenx. Table 2. Summary Statstcs of Explanatory Varables Varables Transfer Transfer Remttance All househols onors recpents recpents Remttance 97(272) 27(149) 347(412) 52(201) Penson 71(362) 20(60) 42(135) 36(156) Income 4235(24126) 1132(6934) 1539(2415) 1305(7962) Pre-transfers 4210(24129) 996(6941) 1528(2416) 1284(7963) ncome Age of hea 49(14) 51(16) 53(14) 51(13.81) Prmary hea Seconary hea Female hea Unemploye hea Sck hea Dsable hea Househol sze 5.83(2.68) 4.85(2.41) 5.76(2.58) 5.69(2.58) Employe 1.42(1.32).85(1.00) 1.12(1.22) 1.20(1.17) members Mgrant househol New member As Ababa Sample Sze 136 (10.23%) 208(15.64%) 197(14.81%) 1330(100%) Note: For contnuous varables, stanar evatons are prove n parentheses 10 To the best of my knowlege there s no stuy that nclue mgraton hstory as a etermnant of transfers 18

21 Table 2 shows that there are conserable fferences among the fferent sub samples on remttance an the other ncome varables. The mean monthly remttance s 52 Brr for the whole sample whle t s 97 Brr an 27 Brr for transfer onors an recpents respectvely. The fference n the mean remttance receve between the two groups s manly ue to the sgnfcant fference n the fracton of househols who receve remttance. As can be seen from table 1, 25% of the onors receve remttance whle only 8% of the recpents receve remttance. But the average remttance s also larger for the onors than for the recpents even contonng on recevng; the average contonal remttance s 389 Brr for the onors an 347 Brr for the recpents. Lookng at the mean total ncome whch nclues transfers, t s apparent that the onors are by far better-off than the recpents. The mean total ncome for the recpent group s lower than the mean for the whole sample. The pre transfer mean ncome for the recpent group s smaller even compare wth the mean for those who o not partcpate n transfers (who nether gve nor receve) though not shown n table 2. I.e., the recpents were the poorest group before transfers. Ths mples that transfers on average flow from hgh ncome to low ncome househols. The mean ncome for the remttance recevng group s moerately larger than for the whole sample. Dfferences are also observe on the other explanatory varables. The percentage of househols wth hgh school grauate heas s conserably bgger for the transfer recpents (43%) than for the onors (21%). Relatve to ther share n the whole sample, the share of female heae househols s smaller n the onors group an bgger n the recpents group. Half of the transfer recpent househols have unemploye heas whle the percentage of househols wth unemploye hea s 23% for the onors. In terms of househol sze, the recpents are smaller on average compare wth the onors. The average number of employe members s larger for the onors than for the recpents. Proportonally, more transfer onors have new members compare wth transfer recpents. V. Result Man Results Even though I am manly ntereste n the effect of remttance on the amount of transfer gven, I have also nvestgate the effect of remttance on the probablty of gvng transfer. The Probt estmates for the probablty of gvng transfer are reporte n table 3. The effect of remttance s postve as expecte though the magntue s not very bg. A 100 Brr atonal 19

22 remttance leas to a 0.63% ncrease n the lkelhoo of gvng transfer, whch s 7% of the precte probablty of gvng transfer. Table 3. Probt Estmates: The Probablty of Gvng Transfers Varables Coeffcents Margnal Effects Remttance/ (.0212)*.0063(.0707) Penson/ (.0260).0057(.0629) Income/ (.0018)**.0006(.0067) Age of hea (.0206).0028(.0314) Age of hea square/ (.0200).0022(.0247) Prmary hea.1111(.1374).0183(.2054) Seconary hea.4112(.1490)***.0755(.8474) Female hea.0038(.1212).0006(.0067) Unemploye hea.0038(.1349).0006(.0067) Sck hea.0424(.1796).0070(.0786) Dsable hea.2650(.1651).0491(.5511) Househol sze (.0219) (.0056) Employe members.0512(.0445).0083(.0932) Mgrant househol.0910(.1752).0154(.1728) New member.3345(.1079)***.0597(.6700) As Ababa (.1040)** (.4501) Constant (.5362) Pseuo R-Square.0746 Precte Probablty.0891 Note: Stanar errors of the coeffcents are gven n parenthess. For the margnal effects, the effects as fractons of the precte probablty are gven n parentheses. For contnuous varables, the margnal effect s ue to a small change n the varable measure at ts mean value whle for ummy varables t s ue to a change from 0 to 1 keepng the other varables at ther mean values. *, **, an *** represent level of sgnfcance at 10%, 5%, an 1% respectvely Next, the effect of remttance on the amount of transfer s presente. To account for the fact that transfer amount s censore at zero, I use a Tobt regresson an the result s reporte n column 2 of table 4 (for comparson purpose, the estmates base on OLS regresson are presente n table 6 n the appenx). 20

23 Table 4. Estmates of Transfers Gven Varables Tobt Regresson (gross transfers) Rosett-Tobt Regresson (net-transfers) Remttance.3547(.0707)***.1583(.0167)*** Penson.1069(.0843).0321(.0214) Income.0034(.0014)** Pre-transfer ncome.0013(.0004)*** Age of hea (7.45)* -1.84(1.42) Age of hea square/ (7.12)** 2.40(1.35)* Prmary hea 58.84(52.51) -3.06(8.51) Seconary hea (57.76)** (9.93)* Female hea.4722(46.10) -9.32(7.91) Unemploye hea -9.61(51.40) (8.47)*** Sck hea -1.61(68.67) (12.45) Dsable hea 47.35(64.04) (11.92)** Househol sze -2.96(8.24) -2.18(1.42) Employe members 27.31(16.60)* 11.28(3.02)*** Mgrant househol -1.11(68.34) -4.28(11.95) New member (41.45)*** 16.90(7.60)** As Ababa (40.03)** -9.01(6.93) Constant (199.94)* 30.11(37.06) Pseuo R-Square Note: Stanar errors of the coeffcents are gven n parentheses. *, **, an *** represent level of sgnfcance at 10%, 5%, an 1% respectvely Remttance has a strong an hghly sgnfcant effect on the amount of transfer gven. Contonal on transferrng, a one Brr ncrease n remttance leas to a 0.35 Brr rse n transfer whch s farly large. Ths mples that more than one thr of the remttance s transferre to others. The result s consstent wth the precton of the theoretcal moel that a large fracton of remttance s transferre to other househols. Fnally, the result for net transfer base on the frcton (Rosett-Tobt) moel s presente n column three of table 4 (the result of the OLS regresson s gven n table 6 n the appenx). The epenent varable s net transfer whch s gven by the fference between transfer gven an transfer receve whle the explanatory varables are the same except for total ncome whch s replace by pre-transfer total ncome. I assume that the actual net transfer s zero f the latent transfer s between -10 Brr an 10 Brr,.e., I assume 10 for = 1, Net transfer values between -10 an 10 Brr are recoe as 0 s. The man varable of nterest, remttance amount, has a postve effect on net transfer. An atonal Brr of remttance leas to 0.16 Brr more net transfer whch s conserable. But t s smaller than the effect on gross transfer whch was 0.35 Brr. 11 The result s robust to alternatve assumptons about the mnmum postve an negatve net transfers 21

24 The results show that nternatonal remttance has a strong an sgnfcant effect on transfer gven whether gross transfer or net transfer s use. In other wors, a sgnfcant proporton of remttance s transferre to other househols consstent wth the precton of the theoretcal moel. Ths has mportant mplcaton for the unerstanng of the overall effect of remttances. The fact that remttances are share wth non-recpent househols magnfes the postve welfare effect of remttances by extenng the beneft beyon the rect benefcares. It wll also make remttances more equalzng (or less unequalzng) an more poverty reucng. Atonal Results The man result presente above s consstent wth the mplcaton of the moel. In general, the results for the other varables also confrm wth the man result. Lke remttance ncome, total ncome ncreases the os of gvng transfer though the magntue s very small. A 100 Brr atonal ncome ncreases the os of gvng transfer by.06% whch s less than 1% of the precte probablty. Penson ncome oes not have a sgnfcant effect mplyng that t oes not have a separate effect on the probablty of gvng transfers unlke remttance ncome. Compare wth those househols whose heas have not complete prmary eucaton, those wth hgh school grauate heas have 7.6% hgher probablty of gvng transfer whch s 85% of the precte probablty. Havng eucate househol hea mples larger an more stable ncome potental an wth that socal expectatons ncrease. Househols wth new members have 6% hgher probablty of gvng transfer. Havng a new member mght proxy stronger socal network an transfer norms. Fnally, househols from As Ababa are 4% less lkely to gve transfers. Due to ts larger sze an the more heterogeneous nature of ts resents, compare wth the regonal ctes, the norm of mutual nsurance s lkely to be weaker n As Ababa. The three varables whch postvely affect the probablty of gvng transfer also affect the amount of transfer postvely. A one Brr ncrease n total ncome leas to a.003 Brr ncrease n the amount of transfers. The effect s very small an shows that total househol ncome s not an mportant etermnant of transfers. 12 Compare wth those househols whose heas 12 But t s lkely that ncome s measure wth error whch leas to attenuaton bas. There may also be an omtte varable bas arsng from the excluson of the recpent s ncome from the regresson. Snce recpent s an onor s ncome are usually postvely correlate, the bas wll lkely be negatve snce recpent s ncome usually has a negatve effect on transfers. It coul be ue to one or two these reasons why the effect of ncome 22

25 have not complete prmary eucaton, those wth hgh school grauate heas transfer 139 Brr more. Househols wth new members gve 134 Brr more compare wth those who o not have new members. In aton, age of the househol hea an the number of employe househol members affect the amount of transfer sgnfcantly. Age of the househol hea has a negatve effect whle ts square has a postve effect ncatng that there s a U-shape relatonshp between age of the househol an transfer (the turnng pont beng 47 years). 13 The number of employe members has a postve effect; an atonal workng member leas to 27 Brr more transfer. The larger the number of workng members, the bgger an the more versfe the househol s ncome wll be an that leas to more transfers. The result for net transfer s more or less smlar to that of the gross transfer though some fferences are observe. Age of the househol oes not have a sgnfcant effect an the effect of the square age of the househol s sgnfcant only at 10%, but the sgns of ther coeffcents suggest that there s a U-shape relatonshp between age an net transfer as was the case wth gross transfer. The effect of havng a househol hea who s a hgh school grauate s negatve though the magntue s small (an t s sgnfcant only at 10%). It ecreases net transfer by 19 Brr. Ths s contrary to the postve effect on gross transfer an mples that househols wth eucate heas also receve transfers whch more than offset the amount they gve. Controllng for current ncome, more schoolng mples hgher future ncome whch mght lea to more eman for current loans n orer to smooth consumpton. An, because of the mperfect cret markets, prvate transfers mght be use as substtutes for loans (Cox et al, 1998; Cox et al, 2004). Comng from As Ababa oes not have a sgnfcant effect now. Unemployment an sablty of the househol hea, whch not have sgnfcant effect on gross transfer, are assocate wth 29 an 25 Brr lower net transfer respectvely. VI. Concluson In ths paper I have stue the lnk between nternatonal remttances an prvate nterhousehol transfers n a evelopng country context. I frst presente a smple theoretcal s very small. But the result suggests that the effect of ncome wll be small relatve to the effect of remttance even after correctng for the bas. 13 Gven that earnngs are expecte to rse wth age at earler stage an fall later on, the result s contrary to expectaton. Ths coul be because people form famles late (the average househol hea age s 51 years wth a stanar evaton of 14 years) an hence as age ncreases further, ncome mght not ncrease much whle famly responsblty ncreases, a stuaton that leas to the ntal negatve effect. On the other han, after some age, socal commtment ncreases an that entals more transfers. 23

26 moel of nterhousehol transfers base on mutual nsurance. Househols nsure each other by sharng the remttance money they receve from relatves abroa. The man precton of the moel s that, househols who receve remttance transfer a large fracton of t to other househols. Consstent wth the precton of the moel, nternatonal remttance ncreases the amount of transfer sgnfcantly. Contonal on gvng, a one Brr atonal remttance leas to a.36 Brr ncrease n transfer whch mples that more than a thr of the remttance money s transferre to others. The result for net transfer s smlar except that the magntue s smaller. A one Brr atonal remttance, leas to a.16 Brr ncrease n net transfer gven. Ths shows that whether gross transfer or net transfer s use, nternatonal remttance s an mportant etermnant of prvate nterhousehol transfer. The fact that a sgnfcant fracton of the remttance money s transferre to other househols mples that the benefts of remttances are extene beyon the famles of the mgrants. To the extent that remttance recpents are on the onors se, transfers make remttances more equalzng (or less unequalzng) an more poverty reucng. By presentng one way that non-recpent househols coul be affecte, the paper contrbutes to the overall unerstanng of the effect of remttances on evelopng countres. It also as to the lterature on prvate transfers by focusng on how nternatonal remttances affect prvate transfers an shftng focus from transfers receve to transfers gven. 24

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