Remittances and Governance: Does the Government Free Ride?

Through what channel and to what extent does the inflow of remittances affect the quality of governance in the recipient countries? Recent studies suggest that a rise in remittances reduces public goods provision. Scholars generally agree that remittances increase consumption expenditure of the recipient households. This implicit positive correlation between remittances and the ratio of household to government consumption indicates an increasing share of private goods in household consumption. The decreasing share of public goods, on the other hand, tends to reduce households0 incentives to monitor and hold the government accountable. As a result, the external benefits generated by household consumption induce the government to substitute the provision of public goods for remittances, thereby raising the scope of expected benefits for a rational government official from illegitimate transactions with a private partner. Using recently advanced kernel regression methods, we find that remittances lead to higher corruption and poor governance in countries with higher private consumption. These results provide supports for the ongoing global efforts to redirect remittance flows from household consumption toward productive investments.