Do remittances help smooth consumption during health shocks?: Evidence from Jamaica

Remittances represent about 15 percent of Jamaica’s GDP; being the 16th country worldwide in terms of economic significance of remittances. Therefore, assessing to what extent and through what mechanisms remittances are useful for development is highly relevant. Accordingly, we identify whether remittances facilitate consumption smoothing during health shocks in Jamaica. In addition, we investigate whether remittances are subject to moral hazard by receivers, how the informal insurance provided by remittances interacts with formal health insurance, and whether there are differential effects by gender of the household head. Disentangling causality between remittances and household income or consumption is problematic as a result of reverse causation. Therefore, identifying whether remittances serve as a social insurance mechanism toward consumption smoothing would require the existence of an exogenous and unexpected shock suffered by nonreceivers and receivers. In this article, we exploit health shocks (accidents and illnesses) suffered by household members to identify the relevance of remittances as social insurance toward consumption smoothing. After showing that these shocks are as good as randomly assigned, we assess the relevance and significance of remittances as a social insurance mechanism in Jamaica. Our main findings show that health shocks adversely affect total household expenditures by an average of 19 percent. However, remittances totally offset these adverse effects, indicating that in light of idiosyncratic shocks, remittances serve as a social insurance mechanism that offers full protection. We also find that moral hazard concerns are low given that remittances are not used to smooth consumption of presumably undesirable goods for senders such as alcohol. Furthermore, we find that remittances are not relevant as an insurance mechanism against health shocks when private health insurance is present. By contrast, remittances constitute a powerful form of insurance in the absence of private health insurance. In terms of policymaking, our findings identify a particularly vulnerable population: persons without private health insurance who do not receive remittances. Therefore, developing mechanisms to identify this population could serve for targeting complementary safety nets towards this particularly vulnerable group.