Abstract
This paper presents a non-cooperative model of intra-household decision-making regarding investment in migration. It is shown that the combination of liquidity constraints and imperfect commitment are a source of underinvestment in migration. More precisely, we highlight that, if remittances are unenforceable as a repayment for the parent’s contribution in migration transaction costs, then both the migrant and the parent’s liquidity constraints, rather than the household’s liquidity constraint as a whole, matter in determining the investment decision. Besides, the insurance motive for remittances is shown to generate divergence of interest over the characteristics of migration. This result calls for a theoretical approach that properly takes account of potential internalization problems, which the paper intends to offer. Plausibility checks of the model are provided by comparative statics whose outcomes are consistent with previous research on migration and remittances.
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Notes
Rapoport and Docquier (2006) provide a useful overview of the different theoretical explanations behind remittance flows.
In addition, since the level of human capital might increase the probability of successful migration, education expenditures may be seen as belonging to this cost.
The proof of Lemma 1 is available in Delpierre (2010).
This prediction is in contradiction with empirical evidence of a positive link between a migrant’s income and remittances (Lucas and Stark 1985; Hoddinott 1994; Funkhouser 1995; Brown 1997; Sinning 2009). However, in reality, different motives to remit coexist in a unique decision on the amount transferred. For instance, the strategic bequest motive predicts such a relationship (de la Briere et al. 2002) because the migrant’s disposable income positively impacts on her ability to compete with siblings for inheritance. Besides, remittances motivated by investment should also increase with income (Osili 2004, 2007). Finally, altruism goes in the same direction (Lucas and Stark 1985).
Notice that such a relationship would be the outcome of a perfect capital market in which consumers have homogeneous discount factors.
This condition ensures the tangency between the migrant and the parent indifference curves in the space of the parameter of the migration contract \(\left( t,r\right) \).
Recall that the migrant is always indifferent since the parent is the first player and captures the whole surplus.
Proofs can be found in Delpierre (2010).
It can be shown that \(\frac{\partial \chi }{\partial \sigma _{r}^{2}}>0\iff \rho <\frac{\sigma _{r}}{\sigma _{u}}.\)
This model is a principal-agent model. Therefore, the parent entirely reaps the collective and private returns to migration. Hence, when we say that household decision imperfectly internalizes each member’s wellbeing, we speak about the composition of the surplus not about its distribution.
\(\frac{\partial \chi } {\partial \sigma _{u}^{2}}>0\iff \rho <\frac{\sigma _{u}}{\sigma _{r}}\).
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Acknowledgments
I am grateful to Frédéric Gaspart, Stéphanie Weynants, Tessa Bold, Stefan Dercon, Jean-Philippe Platteau, Pierre Dubois, Tatiana Goedghebuer, Bruno Henry de Frahan, Bertrand Verheyden, Shoshana Grossbard, Henrich Brunke and two anonymous referees of Review of Economics of the Household for helpful comments and suggestions. The paper has also benefited from presentations at University of Namur, Université catholique de Louvain, at the CEPET (Central European Program for Economic Theory) workshop in Udine, and the CSAE (Centre for the Study of African Economies) conference in Oxford.
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Delpierre, M. The impact of liquidity constraints and imperfect commitment on migration decisions of offspring of rural households. Rev Econ Household 10, 153–170 (2012). https://doi.org/10.1007/s11150-010-9113-2
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DOI: https://doi.org/10.1007/s11150-010-9113-2