Determinants of Risk Sharing Through Remittances: Cross-Country Evidence

Abstract

The sending of remittances is a decentralised decision of migrant workers, nevertheless it has its macroeconomic implication in providing insurance against domestic output shocks in the recipient economies -a phenomenon known in literature as risk sharing. Using a large sample of 86 developing countries for the period 1990-2010, we establish that remittance inflows serve as an important channel through which risk sharing takes place in the developing world. Although the extent of risk sharing on average stands at 3.3%, there is substantial cross-country variation found in our sample, ranging from 38% for Tajikistan (38%) for Haiti (-13%). Subsequently, we explore why the extent of risk sharing through remittances is so diverse across developing countries. The diversification of migrants turns out to be the leading explanation for the extent of risk sharing via remittances: the more diverse the migration destinations of a country, higher will be the amount of risk shared. In addition, the size of remittance flows appears to have a strong and statistically significant impact on enhancing risk sharing. We also find suggestive evidence that remittances originating from more distant countries facilitate more risk sharing compared to those originating from neighbouring or regional economies. Even after splitting the sample on the basis of country characteristics, our results remain robust.