Taking the differential of the first-order condition for the worker:
Writing out the second order condition for transfers gives
Rearranging terms, we have
Note that all the terms save the one in braces are negative, thus a sufficient condition for the concavity of the immigrant’s surplus function is:
The above assumption implies that a sufficient condition for an interior solution to the immigrant’s problem is that the relative is sufficiently risk averse, such that the direct impact of a change in his wealth on his marginal utility of wealth, in the bad state, exceeds the indirect impact of wealth on the probability of a low output occurring through its effect on the relative’s effort.
To sign the derivative of t* with respect to β, differentiate the first-order condition for the immigrant (3):
For the derivative of t* with respect to WH, we have
Finally, for the derivative of t* with respect to wL and using the sufficient condition A.1, we have
Abel, Andrew, and Laurence Kotlikoff, 1988, “Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism,” unpublished.
Agarwal,Reena, and Andrew W. Horowitz, 2002, “Are International Remittances Altruism or Insurance? Evidence from Guyana Using Multiple-Migrant Households,” World Development, Vol, 30, pp. 2033–4.
Altonji, Joseph, Fumio Hayashi, and Laurence Kotlikoff, 1992, “Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data,” American Economic Review, Vol. 82, pp. 1177–98.
Arnott, Richard, and Joseph E. Stiglitz, 1991, “Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?” American Economic Review, Vol. 81, pp. 179–89.
Banerjee, Biswajit, 1984, “The Probability, Size, and Uses of Remittances from Urban to Rural Areas in India,” Journal of Development Economics, Vol. 16, pp. 293–311.
Barajas, Adolfo, Ralph Chami, Connel Fullenkamp, and Tala Khartabil, 2004, “One Reason Why One Size Doesn’t Fit All: The Role of Remittances in Debt Sustainability,” unpublished.
Bernheim, Douglas, and Oded Stark, 1988, “Altruism Within the Family Reconsidered: Do Nice Guys Finish Last?” American Economic Review, Vol. 78, pp.1034–45.
Bernheim, Douglas, Andre Shleifer, and Larry Summers, 1985, “The Strategic Bequest Motive,” Journal of Political Economy, Vol.93, pp. 1045–176.
Bruce, Neil, and Michael Waldman, 1990, “The Rotten Kid Theorem Meets the Samaritan’s Dilemma,” Quarterly Journal of Economics, Vol. 105, pp. 155–65.
Buch, Claudia M., Anja Kuckulenz, and Marie-Helene Le Manchec, 2002, “Worker Remittances and Capital Flows,” Kiel Working Paper 1130, Kiel Institute for World Economics.
Buchanan, James M., 1975, “The Samaritan’s Dilemma,” in Altruism, Morality, and Economic Theory, ed. by Edmund S. Phelps (New York: Russell Sage Foundation), pp. 71–85.
Chami, Connel Fullenkamp, and Samir Jahjah, 2003, “Are Immigrant Remittance Flows a Source of Capital for Development?” IMF Working Paper 03/189 (Washington: International Monetary Fund).
Chuhan, Punam, Stijn Claessens, and Nlandu Mimingi, 1998, “Equity and Bond Flows to Latin America and Asia: The Role of Global and Country Factors,” Journal of Development Economics, Vol. 55, pp. 439–63.
El-Sakka, M. I. T., and Robert McNabb, 1999, “The Macroeconomic Determinants of Emigrant Remittances,” World Development, Vol. 27, pp. 1493–502.
Elbadawi, Ibrahim A., and Robert de Rezende Rocha, 1992, “Determinants of Expatriate Workers’ Remittances in North Africa and Europe,” World Bank Policy Research Working Paper 1038 (Washington: World Bank).
Glytsos, Nicholas P., 1988, “Remittances in Temporary Migration: A Theoretical Model and Its Testing with the Greek-German Experience,” Weltwirtschaftliches Archiv, Vol. 124, pp. 524–49.
Gubert, Flore, 2002, “Do Migrants Insure Those Who Stay Behind? Evidence from the Kayes Area (Western Mali),” Oxford Development Studies, Vol. 30, pp. 267–87.
Hendrik, Jiirges, 2000, “Of Rotten Kids and Rawlasian Parents: The Optimal Timing of Intergenerational Transfers,” Journal of Population Economics, Vol. 13, pp. 147–57.
Ilahi, Nadeem, and Saqib Jafarey, 1999, “Guestworker Migration, Remittances, and the Extended Family: Evidence from Pakistan,” Journal of Development Economics, Vol. 58, pp. 485–512.
Johnson, G. E., and W. E. Whitelaw, 1974, “Urban-Rural Income Transfers in Kenya: An Estimated-Remittances Function,” Economic Development and Cultural Change, Vol. 22, pp. 473–79.
Lucas, Robert E. B., and Oded Stark, 1985, “Motivations to Remit: Evidence from Botswana,” Journal of Political Economy, Vol. 93, pp. 901–18.
Poirine, Bernard, 1997, “A Theory of Remittances as an Implicit Family Loan Arrangement,” World Development, Vol. 25, pp. 589–611.
Rajan, Ramkishen S., Reza Siregar, and Iman Sugema, 2003, “Why Was There a Precrisis Capital Inflow Boom in Southeast Asia?” Journal of International Development, Vol. 15, pp. 265–83.
Ram, Rati, and Kevin Honglin Zhang, 2002, “Foreign Direct Investment and Economic Growth: Evidence from Cross-Country Data for the 1990s,” Economic Development and Cultural Change, Vol. 51, pp. 205–15.
Russell, Sharon Stanton, 1986, “Remittances from International Migration: A Review in Perspective,” World Development, Vol. 141, pp. 677–96.
Sarno, Lucio, and Mark P. Taylor, 1999, “Hot Money, Accounting Labels and the Permanence of Capital Flows to Developing Countries: An Empirical Investigation,” Journal of Development Economics, Vol. 59, pp. 337–64.
Stark, Oded, and Robert E. B. Lucas, 1988, “Migration, Remittances and the Family,” Economic Development and Cultural Change,Vol. 36, pp. 465–81.
Straubhaar, Thomas, 1986, “The Determinants of Workers’ Remittances: The Case of Turkey,” Weltwirtschaftliches Archiv, Vol. 122, pp. 728–10.
Swamy, Gurushri, 1981, “International Migrant Workers’ Remittances: Issues and Prospects,” World Bank Staff Working Paper 481 (Washington: World Bank).
Ralph Chami is a deputy division chief in the IMF Institute. Connel Fullenkamp is Visiting Professor, Department of Economics, Duke University. Samir Jahjah is an economist in the IMF Institute. The authors would like to thank Adolfo Barajas, Roland Daumont, Samir El-Khouri, Andrew Feltenstein, Mohsin S. Khan, Tala Khartabil, Philip Lane, Miguel Messmacher, Peter Montiel, Mika Saito, Sunil Sharma, Ilhyock Shim, Gabriel Srour, and the participants at the Fourth Annual IMF Research Conference for their thoughtful comments and suggestions.
Nothing in the portfolio approach necessarily contradicts the endogenous migration approach. One may think of the portfolio view in terms of a “selfish” immigrant who only cares about the earnings on her own savings, which she intends to keep for herself. See, for example, Glytsos (1988).
One possible scenario is a labor market with moral hazard; another is when the recipient is self-employed.
Relaxing this assumption would only strengthen our results, since allowing an altruistic immigrant to observe output and hence wages before committing to a transfer would yield a transfer that provides the relative the same consumption across both states of nature, i.e., full insurance (see Chami, 1996).
We could, alternatively, allow for state-contingent transfers, but they do not affect the present analysis (see Chami, 1998).
The derivation is provided in the Appendix.
Note that despite the altruism of the immigrant, the moral hazard problem persists. This is because the relative knows that at the margin the immigrant behaves as an altruist. This induces the relative to lower his effort.