Mental Accounting and Remittances: A Study of Malawian Households

Davies, Simon and Easaw, Joshy and Ghoshray, Atanu (2006): Mental Accounting and Remittances: A Study of Malawian Households.

Abstract

In this paper we use a behavioural approach to studying household consumption behaviour in Malawi. In particular we are interested to know whether households use mental accounting when consuming different categories of good. It is useful for assessing the impact of remittances on household consumption behaviour. We use 1998 cross-sectional data to find the following key results: (i) mental accounting systems are in operation. Remittance income exhibits a higher marginal propensity to save than other income sources, (ii) household income influences consumption habits, (iii) receipt of remittance income impacts on spending habits. This is in line with the theory of remittances and corresponding mental accounting theory, and, finally, (iv) remittances receipts impact positively on the likelihood of consuming education and low income remittance receiving households consume significantly more education at the margin than other households.

• Item Type: MPRA Paper
• Institution: University of Bath, UK
• Language: English
• Keywords: Remittances; Household Behaviour; Consumer Economics; Economic Development; Africa; Malawi
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration; D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis

References

Adams, R.H. (1991), “The Economic Uses and Impact of International Remittances in Rural Egypt”, Economic Development and Cultural Change, Vol.39, pp.695-722.

Adams, R.H. (2002), “Precautionary Saving from Different Sources of Income: Evidence from Rural Pakistan”, World Bank Discussion Paper.

Adams, R.H. (2005), “Remittances, Household Expenditure and Investment in Guatemala”, World Bank Policy Research Working Paper No.3532.

Ainslie, G. (1975), “Special reward: A behavioural theory of impulsiveness and impulse control”, Psychological Bulletin, Vol.82, No.4, pp.463-496.

Alderman, H. and C.Paxson (1992), “Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries”, World Bank Policy Research Working Papers, WPS 1008.

Anderson, C. and N. Nevitte (2006), “Teach your children well: Values of thrift and saving”, Journal of Economic Psychology, Vol.27, pp.247-261.

Angeletos, G.-M., D. Laibson, A. Repetto, J. Tobacman, and S. Weinberg, (2001), “The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation”, Journal of Economic Perspectives, Vol.15, No.3, pp.47-68.

Brambor, T., W.R. Clark and M. Golder (2006), “Understanding Interaction Models: Improving Empirical Analyses”, Political Analysis, No.14, pp.63-82.

Brocas, I., J.D. Carrillo and M. Dewatripont (2004), “Commitment Devices under Self-control Problems: An Overview” in The Psychology of Economic Decisions, Volume 2: Reasons and Choices, Brocas, I. and J.D. Carrillo (eds), Oxford University Press, Oxford, United Kingdom, 2004.

Chami, R., C. Fullenkamp, and S. Jahjah, (2005), “Are Immigrant Remittances Flows a Source of Capital for Development?”, IMF Staff Papers, Vol.52.

Chipeta, C. and W.Kachaka (2005), “Role of Migrants’ Remittances in an unstable Low-income Economy: A Case Study of Malawi”, University of Malawi, Chancellor College Working Paper No.2005/05.

Colloredo-Mansfeld, R. (2005), “Consumption”, in A Handbook of Economic Anthropology, Carrier, J. (ed), Cheltenham, United Kingdom, 2005.

Cox Edwards, A. and M. Ureta, (2003), “International migration, remittances, and schooling: evidence from El Salvador”, Journal of Development Economics, 72, pp. 429-461.

Dercon S., J.Hoddinott and T.Woldehanna (2005), “Shocks and Consumption in 15 Ethiopian Villages, 1999-2004”, Journal of African Economies, Vol.14, No.4, pp.559-585.

Gammeltoft (2002), “Remittances and Other Financial Flows to Developing Countries”, International Migration, Vol.40, No.5, pp.181-211.

Harrower, S. and J.Hoddinott (2005), “Consumption Smoothing in the Zone Lacustre, Mali”, Journal of African Economies, Vol.14, No.4, pp.489-519.

Hart, K. (2005), “Money: one anthropologist’s view” in A Handbook of Economic Anthropology, Carrier, J. (ed) Cheltenham, United Kingdom, 2005.

Hayashi, F. “Test for Liquidity Constraints: A critical Survey and some new Observations”, in Advances in Econometrics, Bewley, T. (ed), Cambridge University Press, Cambridge, 1987.

Heckman, J. (1975), “The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models” Annals of Economic and Social Measurement, Vol.5 pp.475-492 in Maddala G.S., Limited-dependent and qualitative variables in econometrics, Cambridge University Press, Cambridge, 1983.

Ishikawa, T. and K. Ueda, (1984), “The Bonus Payment System and Japanese Personal Savings” in Aoki, M., ed. The Economic Analysis of the Japanese Firm. Amsterdam: North Holland.

Karlsson, N. (2003), “Consumer Self-Control Strategies: An Empirical Study of Their Structure and Determinants”, Journal of Consumer Policy, Vol.26, pp.23-41.

Levin, L. (1998), “Are assets fungible? Testing the behavioural theory of lifecycle savings”, Journal of Economic Behaviour and Organisation, Vol.36, pp. 59-83.

Lewis, A. and A. Winnett, (1995), “Household accounts, mental accounts, and savings behaviour: Some old economics rediscovered?”, Journal of Economic Psychology, Vol.16, pp.431-448.

National Statistical Office (2000), Poverty Profile in Malawi in 1998, National Economic Council, Government of Malawi.

Ratha, D. (2003), “Workers’ Remittances: An Important and Stable Source of External Development Finance”, in Remittances, Development Impact and Future Prospects, Maimbo, S. and Ratha D. (ed.) World Bank Publications, Washington D.C.

Shefrin, H. and R. Thaler, (1988), “The Behavioural Lifecycle Hypothesis”, Economic Inquiry, Vol.36, pp.606-643.

Udry, C. (1990), “Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy”, World Bank Economic Review, Vol.4, pp.251-269.

Zeldes, S.P. (1989), “Consumption and Liquidity Constraints: An Empirical Investigation”, Journal of Political Economy, Vol.97, pp.305-346.