The Insurance Role of Remittances on Household Credit Demand

The economic literature has highlighted how in the absence of income insurance risk averse households may voluntarily withdraw from credit markets, since contract terms may transfer too much risk to the household (Boucher, Carter, and Guirkinger, 2007). Therefore, households may forgo activities with higher expected income in favor of activities with less income variability across states of nature (Morduch, 1995). Recent literature has also evaluated how remittances provide households with insurance against income shocks (Yang and Choi, 2007; Rosenzweig and Stark, 1989) and how remittances may help households bypass financial intermediaries (Woodruff and Zenteno, 2001; Taylor, Rozelle, and de Brauw, 2003). There has been minimal attention, however, on how access to the potential receipt of remittances affects household participation in financial credit markets. On the one hand, the direct effect of remittances might decrease liquidity constraints at the household level and thus decrease credit demand. On the other hand remittances may provide households with insurance and thus increase willingness to accept credit contract terms. In this paper I estimate the effect of the potential receipt of remittances on credit demand. Potential receipt of remittances is estimated by predicting the household's receipt of remittances and variables that proxy for the strength and vulnerability of migration networks. Results indicate that the predicated amount of remittances received at the household level have a positive effect on credit demand.