Remittance Flows under Asymmetric Information: A Contracting Approach
This paper examines asymmetric information about migrant earnings in transnational households and its consequences for remittances. For a sample of Indian households with husbands working in Qatar, we assess asymmetry by contrasting reports of migrant earnings collected from migrants and their wives. On average, wives underreport their husbands’ income by 21%, and underreporting is more prevalent in households with higher earning migrants. Furthermore, the ratio of wives to husbands report of foreign income has a significant explanatory power for remittances: the lower the ratio, the lower the remittances. We develop an exchange motive model of remittances with asymmetric information using the framework of costly state verification. The remittance recipient, at some cost, can determine the true state of income and punish the migrant if he is untruthful. The optimal remittance contract prescribes a threshold for remittances that invites verification only if unmet. The model’s predictions closely match our empirical findings.
External LinkWorld Bank: http://siteresources.worldbank.org/EXTABCDE/Resources/7455676-1401388901525/9576629-1401389030030/Ganesh_Seshan.pdf
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