Working Paper 200 - Analysis of Household Expenditures and the Impact of Remittances using a Latent Class Model: the Case of Burkina Faso

This paper applies a latent classes model to assess the impact of international remittances on households’ expenditures using 2010 cross-sectional data from Burkina Faso. Household expenditures are modeled using the Almost Ideal Demand System (AIDS). With the latent class model, these expenditure equations are estimated simultaneously for both groups of households as well as factors that explain the probability of being in one group or another. The latent class model is used to estimate eight di.erent expenditure equations: food, education, healthcare, durable goods, housing, fuel for cooking, communication (phone), and transportation. Results suggest that the household size, schooling, the age of the head of the household, farmer heads, female heads, access to electricity, living in urban areas, and international remittances contribute to explain household expenditure behavior. Factors that contribute to increase the household chance to live below the poverty line include: household size, if the household head is a farmer, a female, or is aged, or living in a province other than Kadiogo. Factors that increase the household chance of living above the poverty line are: the amount of remittances received, if the head of the household is educated, is Muslim, if the household has access to electricity or public water pump, or if the household lives in the province of Kadiogo. Results also suggested that all the consumption items are necessary goods for households living below the poverty line, and only two items (durable goods and housing) are luxury goods for those living above that line.