International Remittances and Intra-Household Risk-Sharing

A large body of research has established the importance of international remittances as an insurance mechanism against income shocks in developing countries. However, households have additional self-insurance mechanisms, including precautionary savings, labor supply adjustments, and multiple earners. This paper develops a model with heterogeneous two-member households and endogenous international remittances to study the relationship between remittances from overseas workers and other self-insurance mechanisms. I calibrate the model with data from the Dominican Republic, and then use the model to decompose the relative importance of the self-insurance mechanisms used by non-migrant households and households with overseas workers. I find that the response of household behavior (remittances, labor supply, and savings) differs greatly depending on whether the household is a migrant or non-migrant household and on whether the shock hits the overseas worker (usually male) or the left-behind family member (usually female). Allowing for correlated wage shocks within non-migrant households further highlights the insurance benefits of migration by reducing joint exposure to local shocks and altering the composition of self-insurance mechanisms.