Remittances and the Dynamics of Human Capitalin the Recipient Country

This paper provides an analysis of the impact of migration and remittances on the inter-generational evolution of human capital in an economy that is characterized by the existence of a poverty trap at a low level of human capital. The analysis is conducted within an overlapping generation model, where parental investment in education are driven by weakly altruistic motivations. Remittances boost educational expenditure in recipient households, and they can determine a decisive impact on the long-term dynamics of human capital under favourable assumptions on the wage differential and on migration costs. Under these assumptions, an exogenous probability to migrate represents an equal probability of moving out of the poverty trap, that fades away in the long run, as remittances lead all households to converge towards the equilibrium at a high level of human capital. Although this model does not analyze the general equilibrium effects of remittances – as it is grounded on the independence of households’ dynamics – it provides a framework that is open to such an extension, that is called for by the literature on the Dutch Disease effects of remittances.