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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Remittance Flows under Asymmetric Information: A Contracting Approach
Organization Unit
  • Ganesh Seshan
  • Robertas Zubrickas
  • English
Institution University of Zurich
Series Name SSRN
Number 2266851
Date 2013
Abstract Text This paper studies the effects of asymmetric information about migrants' earnings in split households on remittance behavior. We use the framework of costly state verification in modeling the migrant-recipient relationship, where the uninformed recipient can punish the migrant if he is found lying about his earnings. The optimal remittance contract implicitly offered by the recipient prescribes a threshold for remittances that invites verification if unmet. Consequently, the migrant is truthful but only up to this threshold. The model posits that higher earning migrants underreport their income more and that underreporting prevails in households where wives are less aware of migrants' economic conditions, have conflicting preferences, weaker bargaining power and more pessimistic beliefs. It follows that greater underreporting is associated with lower remittances. The empirical patterns obtained from a unique matched data with cross-reports from husbands working in Qatar and wives back in India closely match our theoretical predictions.
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