Consumption effects of foreign remittances: The case of Jamaica

The term, remittances, refers to proceeds from the migration of labor that are sent to aid individuals remaining in the migrants’ home communities.  In this paper, we investigate whether remittances alter the consumption pattern of recipient households in Jamaica. We argue that remittances can be modeled as a private quasi-welfare program in which families or friends seek to assist their less fortunate compatriots in the absence of well-funded public programs. We use Engel curve estimation and the two-part fractional response models as well as an instrumental variables technique to account for selection bias and endogeneity of remittances. What sets this work apart is the use of both disaggregated consumption and income into categories based on the types of consumption and source of income respectively. The dependent variables are categories of consumption as defined in the Jamaican Survey of Living Conditions. We further disaggregate these major consumption categories in order to focus on certain expenditures of interest such as spending on schooling, gambling and donations.  We find that receipt of remittances significantly alters the recipient households’ expenditure allocations and that the marginal propensities to consume out of assets and out of non-property income are different. We also find that, as expected, remittances which are earmarked for the support of children have positive effect on the share of spending on schooling in the budget, although this relationship is not necessarily dollar for dollar.  These findings are robust to a number of specification checks and have important implications for those remitting, those receiving, and governments looking for ways to tax this less documented source of income.