Remittances, Moral Hazard and Monitoring: A Study on the Effects of Microfinance Institutions' Monitoring on Opportunistic Remittance Receivers
Abstract: The canonical tradeoff between risks and incentives is in this study applied in a new setting: between a migrant and her relatives remaining at home. Receiving monetary remittances (private cash or in kind transfers) from the migrant reduces the risk of income shortfalls, which simultaneously creates disincentives for the receivers at home to work. Traditionally, studies have used only the labor-leisure model to explain why remittances make recipients reduce their labor supply, whereas the problem of moral hazard has been accounted for by few. Therefore, the purpose of this thesis is to provide further research on the moral hazard explanation for the negative relationship between the remittance receipt and labor supply. Furthermore, since many remittance receivers are also microfinance borrowers, we recognize the coexistence of these capital flows and try to find out whether the remittance receivers' opportunistic behavior is affected by the monitoring associated with microfinance program participation. Using a household survey conducted in rural Bangladesh, we find support for the moral hazard hypothesis and that microfinance monitoring alleviates the problem among men. However, our tests do not generate significant results for women, which raises a need of further research and additional data capturing the characteristics of female labor supply.
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