Will remittances suppress or increase household income in the migrant-sending areas? Modeling the effects of remittances in rural China

Abstract

There are ongoing debates about whether remittances suppress or increase household income in the migrant-sending areas. The literature has not explained the heterogeneous results in a unified framework. This paper proposes a new concept, remittance capitalization potential (RCP), to conceptualise the possible switch between suppression effect and incentivization effect of remittances in the migrant-sending areas. The theoretical model reveals that remittances suppress household income in the migrant-sending areas when the RCP level is below a certain threshold, while remittances help increase household income in the migrant-sending areas when the RCP level is above a certain threshold. Moreover, the factors that affect the RCP level, such as the level of household human capital, ultimately determine whether remittances exert suppression or incentivization effect in the migrant-sending areas. Using China Family Panel Studies (CFPS) data, this paper adopts the method of instrumental variables to estimate how the level of household human capital alters the effect of remittances on household income from agricultural production in rural China. The models show that in the households with the head agricultural producers who are illiterate or semi-literate, the remittances suppress the agricultural income significantly. In the households with the head agricultural producers who are literate, however, the impact of remittances on the agricultural income switch to be positive significantly. The robustness tests not only support the results from the base models, but also confirm that the level of household human capital works as an influencing factor of RCP and determines whether remittances suppress or increase household income in the migrant-sending areas.