Safety net for agriculture: effect of idiosyncratic income shock on remittance payments

Purpose - The purpose of this paper is to examine the effect of illness-driven agriculture income shocks on remittance payments in Ghana using a nationally representative household pseudo-panel data set for 1991/1992, 1998/1999 and 2005/2006. Design/methodology/approach - The two-stage least square instrumental variable technique is used. This is compared with the ordinary least squares estimator. Findings - The author finds that households in Ghana use remittances to protect themselves from negative agriculture income shocks. The study further reveals that the protection is resilient in female-headed households. Research limitations/implications - The question of remittances as a safety net mechanism is interesting, but the limitation is the challenges involving the counterfactual setup in studying the effects of endogenous migration choices. Practical implications - The study provides that, as far as microeconomic factors are concerned, remittances increase in times of negative agriculture income shocks attributed to illness in Ghana. Social implications - The finding points to the fact that remittance payments play an essential role as an informal safety net during illness-driven agriculture income shock especially for female-headed households in Ghana. This has an important implication for poverty reduction in Ghana. Originality/value - It provides an empirical test of the claim that remittance flows buffer idiosyncratic shock with micro-level household data that incorporates both internal and international remittances. The paper introduces gender dimension into idiosyncratic shocks’ impact. Also, the data set makes it possible to provide a reliable set of agriculture income shock estimates.