The Role of Institutions, Culture, and Wellbeing in Explaining Bilateral Remittance Flows: Evidence Both Cross-Country and Individual-Level Analysis

This paper explores the determinants of bilateral remittance flows at the country-level; specifically, institutional quality, wellbeing, and culture using a novel dataset published by Ratha and Shaw (2007). Next, we look for support in the German Socio-Economic Panel using individual level regressions which allows us: (i) to control for various individual correlates and fixed effects, and (ii) to analyze remittances sent for different purposes separately. We uncover important relationships with these unique datasets. The country-level results indicate; (i) classical gravity equation variables explain bilateral remittance flows (ii) institutional quality, wellbeing and cultural differences play important role in explaining bilateral remittance flows (iii) financial variables such as exchange rate and interest rate differentials matter as well. Institutional quality matters more for remittance flows between high-income countries and between low-income countries but it does not explain the remittance flows from high-income to low-income countries. Cultural differences become a more dominant factor in explaining the flows between low-income countries. These findings are also supported by the individual level analysis. In addition, German migrants send less money back home when they feel like more German and become home-owners. Countries receive less remittances from Germany when they become happier, their health-care and social-security system improve but receive more with confidence in government, chance of war, and improved political system. These institutional factors only matter for remittances sent for family support. Financial variables such interest rate and exchange rate differentials however, only matter for remittances sent for savings purposes. The results have important policy implications. Institutions matter for remittances but treating whole institutions as one in this framework can be misleading. The role of financial variables, indicators of institutions, and culture depend on the form of remittance and the characteristics of receiving and sending countries.