Safety net for agriculture: effect of idiosyncratic income shock on remittance payments

Abstract

PurposeThe purpose of this paper is to examine the effect of illness-driven agriculture income shocks on remittance payments in Ghana using a nationally representative household pseudo-panel data set for 1991/1992, 1998/1999 and 2005/2006.Design/methodology/approachThe two-stage least square instrumental variable technique is used. This is compared with the ordinary least squares estimator.FindingsThe author finds that households in Ghana use remittances to protect themselves from negative agriculture income shocks. The study further reveals that the protection is resilient in female-headed households.Research limitations/implicationsThe question of remittances as a safety net mechanism is interesting, but the limitation is the challenges involving the counterfactual setup in studying the effects of endogenous migration choices.Practical implicationsThe study provides that, as far as microeconomic factors are concerned, remittances increase in times of negative agriculture income shocks attributed to illness in Ghana.Social implicationsThe finding points to the fact that remittance payments play an essential role as an informal safety net during illness-driven agriculture income shock especially for female-headed households in Ghana. This has an important implication for poverty reduction in Ghana.Originality/valueIt provides an empirical test of the claim that remittance flows buffer idiosyncratic shock with micro-level household data that incorporates both internal and international remittances. The paper introduces gender dimension into idiosyncratic shocks’ impact. Also, the data set makes it possible to provide a reliable set of agriculture income shock estimates.