How heterogeneity of recipients influences the income equalising impact of migrant’s remittances

This research develops a dynamic theoretical framework to study the interaction between migrants’ remittances and entrepreneurship, together with the effect of these phenomena on inequality and income distribution. It is based on an overlapping generations model in which inequalities are explained by a combination of capital market imperfections and fixed costs of investment. Together, these features give rise to credit rationing such that some members of the population are denied opportunities that would otherwise make them better off. Within this framework, we study the implications of remittances associated with child migration. We consider two alternative scenarios which differ according to who receives remittances – parents or siblings. We found that when migrant children send remittances to their parents, such transfer would result in higher bequests though not necessarily initiate entrepreneurial activities and a reduction in the extent of inequality. On the other hand, when migrant children send remittances to their siblings, such transfer would not only result in greater bequests, but also it reduces the critical level of wealth needed to get access to capital market, implying that remittance flow generates investment opportunity to even poorer members of the society. To enhance the income equalising effect of remittances, the government might consider providing extended support to households who are sending (relatively) younger members of the family abroad to earn higher wages. Studying how dynamic effects of remittances depend critically on the heterogeneity of recipients offers a further perspective that has not been explored before