Spillover effects of remittances on local public spending in developing economies

Abstract

We develop a political economy model to study spatial spillover effects of remittances on local public goods with inter-regional positive externalities. Our model postulates that spillovers of remittances are asymmetric with a com-plex pattern that depends on the degree of externalities of public spending, the inter-regional inequality of income, and whether local public goods are complementary or substi-tutes. We develop several tests to be verified empirically, for instance, our model states that if local public goods are substitutes and externalities are moderate, remittances re-ceived by households in one locality increase government spending in that locality but reduce spending in other dis-tricts. If externalities are significant, remittances affect local public spending in high-income localities but do not affect spending in low-income localities.