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«Remittances and the Problem of Control: A Field Experiment Among Migrants from El Salvador Nava Ashraf Diego Aycinena Harvard Business School ...»

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Preliminary and incomplete.

Remittances and the Problem of Control:

A Field Experiment Among Migrants from El Salvador

Nava Ashraf Diego Aycinena

Harvard Business School Francisco Marroquin University

Dean Yang∗

Claudia Martinez

University of Chile University of Michigan

February 2009


While remittance flows to developing countries are very large in magnitude, it is unknown whether migrants desire more control over the uses to which remittances are put. This research uses a randomized field experiment to investigate the importance of migrant control over the use of remittances. In partnership with a large Salvadoran bank, we offered US-based migrants from El Salvador the opportunity to channel remittances into savings accounts in their home country. Migrants were randomly allocated varying amounts of control over El Salvador-based savings. The results provide evidence that migrants seek to control savings accumulation by remittance recipients back home. When migrants have the option of greater control over El Salvador-based savings accounts, they are more likely to open such accounts and accumulate more savings in them. The effect is large in magnitude: from a base of roughly $400, savings more than double when migrants have the option of full control over accounts, compared to roughly zero savings growth in the control group. Other results suggest that migrants use enhanced control to improve their bargaining power over the savings behavior of recipients, rather than saving autonomously in their own accounts.

Keywords: migration, remittances, intrahousehold allocation, microfinance JEL codes: F22, O16 ∗ Corresponding author. Email: deanyang@umich.edu. We thank the core members of the project team at ESSMF (Angela Gonzalez, Michelle Guevara, Ronald Luna, Amaris Rodriguez, and Eric Rubin), at FUSADES (Margarita Sanfeliu and Mauricio Shi), and at Banco Agricola (Gustavo Denys, Carla de Espinoza, Mauricio Gallardo, Sabina Lopez, Ernesto Magana, Katya O’Byrne, and Paul Ponce). We received valuable feedback and suggestions from Manuel Agosin, Natasha Bajuk, Angus Deaton, Suzanne Duryea, Jon Guryan, Ricardo Hausmann, Takatoshi Kamezawa, Michael Kremer, Steve Levitt, John List, Adriana Lleras-Muney, Ernesto Lopez-Cordova, Osmel Manzano, Doug Massey, Margarita Mooney, Hugo Ñopo, Chris Paxson, Alejandro Portes, Jesse Rothstein, Jesse Shapiro, Ernesto Stein, Don Terry, Steve Wilson, Viviana Zelizer, and participants in several seminars. Fernando Balzaretti, Sebastian Calonico, and Cristian Sanchez provided excellent research assistance. This research was made possible by financial support from the John D. and Catherine T. MacArthur Foundation, the Inter-American Development Bank, the Multilateral Investment Fund, the Empowerment Lab at Harvard University’s Center for International Development, and the University of Michigan’s International Policy Center.

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Between 1965 and 2000, individuals living outside their countries of birth grew from 2.2% to 2.9% of world population, reaching a total of 175 million people in the latter year.1 The remittances that these migrants send to origin countries are an important but relatively poorly understood type of international financial flow. Migrant remittances compare in magnitude to other important financial flows destined for developing countries, such as official development assistance and direct foreign investment. In 2007, migrant remittances sent to developing countries amounted to US$251 billion.2 Improvements in remittance data collection and continued immigration flows to developed countries have generated substantial recent interest in the remittance phenomenon, as evidenced by a proliferation of recent policy-oriented reports.3 Recent research in the economics of migration has documented several beneficial impacts of remittance flows on household well-being and investments. Households in the Philippines experiencing exogenous increases in remittances become more likely to leave poverty status, to send their children to school, and to invest in new entrepreneurial enterprises (Yang and Martinez 2005, Yang 2006, Yang 2008b). In El Salvador, households receiving more remittances have higher rates of child schooling (CoxEdwards and Ureta 2003). In Guatemala, households receiving remittances tend to invest more in education, health and housing (Adams 2005), and international remittances are associated with lower depth and severity of poverty (Adams 2004). In Mexico, households with migrants invest more in small businesses than households without migrants (Woodruff and Zenteno 2007). In addition, remittances appear to serve as insurance, rising in the wake of negative shocks (Yang and Choi 2007, Yang 2008a).

To date, however, we know very little about how migrants make their remittancesending decisions. In particular, it is unknown whether migrants desire greater control over how family members back home use the remittances they receive. Do migrants and 1 Estimates of the number of individuals living outside their countries of birth are from United Nations (2002), while data on world population are from U.S. Bureau of the Census (2002).

2 Ratha et al (2008).

3 Reports funded by the Multilateral Investment Fund of the Inter-American Development Bank include Pew Hispanic Center (2002) and Terry and Wilson (2005). The World Bank has also funded substantial publications on the topic, such as World Bank (2006) and World Bank (2007).

2 remittance recipients typically agree on the uses to which remittances should be put? If not, are migrants able to control how remittances are spent by recipients? How does lack of control affect the number of people remitted to, the amounts remitted, and the uses to which remittances are put? In the absence of control, do migrants simply send remittances as “gifts” with no attempt to direct their use? If migrants were to be given more control over remittance uses, how would they direct them to be used? A better understanding of these questions could have substantial impact on public policy, by suggesting policies to further stimulate remittance flows and potentially channel them towards more productive uses in migrant source countries.

This paper focuses on better understanding the extent to which remittance flows are reduced by the fact that migrants have no direct control over how remittances are used by recipients. Migrants may have greater preferences for investment and savings than recipient households, but can only imperfectly monitor how remittances are spent.

Without direct control over the use of remittances, therefore, migrants may choose to keep their earnings overseas and to remit less. This research aims to shed light on the extent to which migrants’ lack of direct control over the use of remittances affects remittance flows, and on the impact of new financial products that could increase migrant control.

We focus on improving the ability of migrants to ensure that remittances are deposited and accumulated in savings accounts in the home country. In survey data collected as part of this study, U.S.-based migrants from El Salvador report that they would like recipient households to save 21.2% of remittance receipts, while recipient households prefer to save only 2.6% of receipts. Migrants often intend the savings to be for the use of the recipient household in the future, but such savings also can be intended for the migrant’s future use. In the latter case, migrants may send their own funds to be saved in El Salvador because they perceive savings held in the U.S. as relatively insecure (particularly for undocumented migrants who fear deportation and loss of their assets).

We designed a field experiment that offered new facilities for Salvadoran migrants to directly channel some fraction of their remittances into savings accounts in El Salvador. We developed these savings facilities in conjunction with Banco Agricola, El Salvador’s largest bank. To isolate the importance of migrant control over savings, we 3 test demand for different products that offer migrants varying levels of control. For example, we investigate differential demand for savings accounts that must be solely in the name of a remittance recipient in El Salvador, versus accounts that are either jointly owned with the migrant or for which the migrant is the sole owner. In addition to raising savings rates in migrant families, these new facilities have the potential to stimulate household-level investments (in, for example, education, health, housing, and entrepreneurship) that would be paid for via the accumulated savings.4 Impact evaluation uses a treatment-control framework. Migrants in the sample are randomly allocated to be offered one of three different savings facilities, or to a control group that is offered no new savings facilities. An innovative aspect of the project is that baseline surveys are administered to both migrants in the U.S. and their corresponding remittance-receiving households in El Salvador. Such matched migrant/source-household surveys are rarely attempted, and so the resulting dataset will be extremely valuable for migration researchers interested in capturing a complete picture of the socio-economic situation of migrant families.

This research makes new contributions to a large literature in economics on intrahousehold decision-making. Attempts to understand the extent and nature of conflict between household members are central to research on the economics of the family, in both developed and developing countries. A wide variety of empirical studies have cast serious doubt on the “unitary model” of the household, the proposition that the joint actions of a household comprised of separate optimizing individuals can be represented as the actions of a single utility-maximizing agent.5 More recent models therefore take explicit account of potential preference differences among household members. Manser and Brown (1980) and McElroy and Horney (1981) model the allocation of household resources as the solution to a Nash cooperative bargaining problem, where the extent to which an individual’s preferences hold sway depends on his or her “threat point” (utility in the event of household dissolution or divorce). Lundberg and Pollak (1993) assume instead that the threat point 4 The impact of our experimental treatments on these later outcomes in recipient households in El Salvador will be the subject of future companion papers.

5 See the review in Strauss and Thomas (1995), as well as, more recently, Duflo (2003), Rangel (2006), and Martinez (2006).

4 is determined by a non-cooperative equilibrium within the household. Browning and Chiappori (1998) make the more minimal assumption that households achieve efficiency of resource allocation; their empirical tests provide evidence in favor of the efficient household model, rejecting the unitary model. However, even the minimal assumption of efficiency has been called into question by Udry (1996), who finds productive inefficiences in resource allocation across male- and female-controlled farm plots in Burkina Faso, and Dubois and Ligon (2003), who document intra-household allocative inefficiencies in the Philippines.

A leading candidate explanation for observed inefficiencies is asymmetry of information in the household, so that family members cannot monitor each other well enough to enforce mutually-beneficial cooperative agreements. This idea has motivated new research that focuses on households with migrant members, because—due to the absence of the migrant member—these are households where information asymmetries are likely to be particularly pronounced. Overseas migrants may not share the same objectives as family members remaining back home, in particular regarding the use of remittances. For example, migrants may prefer that remittances be saved or invested, while remittance recipients may prefer consumption over investment.6 When overseas migrants cannot perfectly monitor how recipients use remittances, remittance amounts may be lower than under perfect information. De Laat (2005) shows that male Kenyan migrants spend considerable resources monitoring their rural wives, consistent with the existence of moral hazard in wives’ implementation of husbands’ remittance instructions.

Chen (2006) finds evidence in China that non-cooperative behavior by wives when husbands have migrated is greater for behaviors that are more difficult to monitor.

This research also contributes to our understanding of the use of financial services by poor and particularly immigrant populations in the United States. Existing survey work has documented that Hispanics in the U.S. are less likely to have bank accounts than the native white population.7 Jankowski, Porter, and Rice (2007) document that demand for US$100 bills is higher in Chicago zip codes that have higher immigrant (and 6 Ashraf (forthcoming) shows that husbands and wives change whether they choose to consume or save their money when they are being observed by their spouse.

7 The 2001 National Survey of Latinos finds that, like Latinos in general, Salvadorans in the US tend to be less likely to use financial products than whites or African-Americans. Only 67% of Salvadorans have a bank account, compared with 76% of African-Americans and 95% of whites.

5 specifically Hispanic) population shares. They interpret this as evidence that Hispanic immigrants have poor access to formal savings facilities, leading them to resort to cash savings ($100 bills are preferred for cash savings due to reduced bulkiness). To our knowledge, however, ours is the first study to examine demand for savings facilities by immigrants in the U.S., and in particular how the level of migrant control over such facilities influences demand.

This study assesses whether conflict and information asymmetries in the household lead to lower remittances, and whether innovative financial products—that give migrants direct control over savings—encourage migrants to raise their remittance amounts. This is the first randomized field experimental examination of remittancerelated financial services among migrants in a developed country. Comparisons across the various treatment conditions will reveal the impact of migrant control on account take-up, remittances, and savings growth. This research represents a substantial improvement over existing (non-experimental) studies which must infer the existence of control problems indirectly, and where the direction of causation is not known with certainty.

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