Private Transfers and the Crowding Out Hypothesis: Semiparametric and Threshold Regression Evidence from Four Developing Countries

This paper investigates whether there is a non-linear relationship between income and the private transfers received by households in developing countries. If private transfers are unresponsive to household income, expansion of public social security is unlikely to crowd out private transfers, contrary to concerns first raised by Barro and Becker. There is little existing evidence for crowding out effects, but this may be because they have been obscured by methods that ignore non-linearities. If donors switch from altruistic motivations to exchange motivations as recipient income increases, a sharp non-linear relationship between private transfers and income may result. In fact, threshold regression techniques find such non-linearity in the Philippines, where 30-80% of private transfers might be crowded out for low-income households [Cox, D., Hansen, B., and Jimenez, E., 2003, How responsive are private transfers to income? Evidence from a laissez-faire economy, Journal of Public Economics.]. To see if these non-linear effects occur more widely, semiparametric and threshold regression methods are used to model private transfers in four developing countries – Papua New Guinea, Indonesia, Vietnam and Cambodia. The results suggest that non-linear crowding-out effects are not important features of transfer behaviour in most of these countries, so expansions of public social security to cover the poorest households need not be stymied by offsetting private responses