The Impact of Aid on Recipient Behavior: A Micro-Level Dynamic Analysis of Remittances, Schooling, Work, Consumption, Investment and Social Mobility in Nicaragua

Remittances are a very important source of income for many Nicaraguan families. More than 40% of all households receive remittances that on average amount to 12-15% of total household income in these households. More than 30% of these households receive remittances at least monthly, implying that it is a relatively stable source of income. This paper shows that remittances do tend to reduce the vulnerability of households and increase their upward social mobility, at least as long as the households do not depend too heavily on remittances. However, remittances also cause moral hazard problems. Nicaraguans tend to reduce their labor supply in response to more remittances, and they also tend to reduce their savings rates, both of which are detrimental to long run economic growth.