Remittances & Moral Hazard

Yasser Abdih, Ralph Chami,Jihad Dagher, and Peter Montiel in an IMF working paper(PDF):

Conclude that despite their nature as household-to-household private income transfers,remittance inflows may have adverse effects on domestic institutional quality – specifically,on the quality of domestic governance – that are similar to those of large resource flows. In our analytical model, this effect arises because when households receive remittances, the government finds it less costly to free ride on the households and their emigrant relatives and divert resources for its own purposes. In other words, because access to remittance income makes government corruption less costly for domestic households to bear, the government engages in more corruption. Remittances, by acting as a buffer between the government and its citizens, give rise to a moral hazard problem; these flows allow households to purchase the public good rather than rely solely on the government to provide that good, which reduces the household’s incentive to hold the government accountable.