The Transfer of the Remittance Fee from the Migrant to the Household
Akira Shimada
Faculty of Economics, Nagasaki University

Abstract
This paper discusses the problem of increasing remittances. It is often argued that theremittance fee needs to be lowered to increase remittances. We show that remittances
become larger by increasing the receiving fee whereas they become larger by reducing thesending fee. We also show that, by transferring the sending fee from the migrant to thehousehold, remittances become larger than those without transfer. It is shown that for thispurpose the home country’s government can collect the sending fee from the household astaxes, and to pay it to the migrant as a subsidy.

JEL Classification: D64; F22; F24

Keywords: Migrant; Household; Transfer; Remittance fee; Altruism

Email address for correspondence: shimada@nagasaki-u.ac.jp

11. Introduction
In this paper, we discuss the problem of increasing the amount of remittances, assuming asimplified economy in which a representative migrant working in the host country sends
part of his wages to a representative household in the home country as remittances. We aregoing to show that the home country can realize a larger amount of remittances bytransferring the remittance fee from the migrant to the household.
Today, the amount of remittances is increasing very rapidly, and numerous studies havebeen conducted on remittances. Among them, the motives for, and the use of, remittances
have been most contentious. Debates on these issues are not likely to be conclusive.1
In spite of this, remittances have become one of the most important sources of externalfinancing for many developing countries. According to Ratha (2005), remittance flows rank

1

Many researchers argue for various motives. In addition to altruism and self-interest,

motives such as co-insurance between migrants and households, or repayment of a loan
from their families, are also considered to explain the reasons for sending remittances.
Different motives are, of course, not mutually exclusive. See Lucas and Stark (1985),
Rapoport and Docquier (2006), and Ruiz and Vargas-Silva (2009) for the motives forsending remittances. There are two major arguments regarding the use of remittances. One
group of studies, e.g., Durand et al. (1996), Taylor (1999), Woodruff and Zenteno (2001),
argues that a significant part of remittances is used for investment and development
purposes. Another group of studies, e.g., Massey and Parrado (1994), Koc and Onan (2004),
Semyonov and Gorodzeisky (2008), argues that most of remittances are used for
consumption and non-development purposes.

2behind foreign direct investment (FDI) as a source of external funding for developing
countries. Remittances contribute substantially to the development of the economy and thealleviation of poverty. They are used as capital for investment. They are also an importantsource of funds for low-income households. Many households often depend on them tocover day-to-day living expenses and to provide a cushion against emergencies. We caninfer from these facts that remittances have positive effects on the home country of
migrants.2
Accordingly, many developing countries are actually attempting to increase remittances,and international organizations such as the World Bank are also promoting remittances.3
There is widespread recognition that in order to increase remittances we should lower theremittance fee. According to Ratha (2005), the average cost of transferring remittances is in
the range of 9.5 per cent, and this is due to weakness in the financial sector. To increase
remittances, Ratha (2005) argued that the financial sector should be strengthened. Specific2

However, remittances may also have some unpleasant consequences. For example,

remittances may impair the household’s incentive to work (Amuedo-Dorantes and Pozo,
2006). Negative outcomes also arise from asymmetric information about the household’s
effort between migrants and households (Chami et al., 2005), or from the presence of moral
hazard (Naiditch and Vranceanu, 2009).
3

This does not mean that increasing the amount of remittances is not without problems.

There are people who abuse remittances. Remittances may be larger because of increases inmoney laundering and terrorism financing. In addition, increases in informal remittances
will prevent the deepening of the home country’s financial system.

3

policy recommendations for increasing remittances were provided by Ratha and Riedberg(2005). De Luna Martínez (2005) argued that both remittance-sending andremittance-receiving countries must make efforts to reduce the remittance fee, and thatco-ordination for this purpose between the authorities of these countries is necessary.
Brown (2006) and Carling (2008) also advocated fee reduction. Freund and Spatafora(2008) empirically confirmed the negative effects of the remittance cost on the amount ofremittances. Moreover, faced with the declining estimates on remittance flows todeveloping countries in 2009, Ratha stated in the press release of the World Bank (2009)that reducing remittance fees and developing innovative tools to leverage remittances forfinancial inclusion and capital market access are necessary as a part of our response to thefinancial crisis.
Remittance fees are usually classified into two kinds; fees that migrants must pay forsending remittances and the fees that households must pay for receiving remittances. These
fees are likely to have different effects on remittances, depending on the relationshipbetween migrants and households.
Many of previous studies were implicitly referring to the sending fee. However, except
for De Luna Martínez (2005), they have not clearly specified which fee should be lowered.
Moreover, even if lowering the fee is the most appropriate policy, it is not easy to
implement. This is not only because the home country’s government cannot directly control
the fee set by the private financial institutions, but also because changing the fee will affectthe utility and the profits of the agents involved in sending and receiving remittances. Theirinterests are not always consistent.
Therefore, in this paper we explicitly distinguish between the sending fee and the4receiving fee, and we investigate how these fees affect remittances. By doing so, we try tofind a way to increase the amount of remittances without affecting the utilities and the
profits of the agents involved.
We find that remittances decrease with the sending fee but increase with the receiving fee.
We also find that the home country can increase the amount of remittances by transferring
the sending fee from the migrant to the household. Since such a transfer does not affect theinterests of agents, the home country’s government can realize this by collecting thesending fee from the household as taxes, and paying it to the migrant as a subsidy.
The remainder of this paper proceeds as follows. In Section 2, we model an economy
consisting of a representative migrant and a representative household. In Section 3, we firstconsider the problem of maximizing remittances without assuming the transfer of the fees.
We then consider the same problem under the transfer. In Section 4, we present concluding
remarks.

2. The Model
This section models an economy in which migrants work in the host country and send
remittances, and households remain in the home country and receive remittances.
The representative migrant earns income by YM* in the host country’s currency.
Hereafter, the uppercase letters with (without) an asterisk are expressed in the host (home)country’s currency. YM* is given exogenously and does not change throughout the analysis.
The representative migrant sends remittances to his household. We assume that migrants
are altruistic towards households, and that at the same time they are seeking theirself-interest. Accordingly, remittances are made for both altruistic and self-interest motives.

5

The amount of remittances R* ( YM* ) is determined by the representative migrant tomaximize his utility.
The representative household earns income by YH before receiving remittances, andspends part of the remitted money on its present consumption, and the rest on investment
for the migrant’s future consumption, as specified by the representative migrant.4 In
particular, the ratio1  k , where k is a constant and 0  k  1 , of remittances after paying
the receiving fee, is spent on the household’s present consumption and the ratio k is spenton the migrant’s investment.
Households care about the well-being of migrants, i.e. they are also altruistic towards
migrants. Accordingly, as assumed in the first chapter of Stark (1995), migrants andhouseholds are mutually altruistic.
Remittances are made through formal channels, and migrants and households have to
pay a fee to send and receive remittances. We denote the sending fee and the receiving fee
by CM* and CH , respectively. We give the sending fee and the receiving fee exogenously,
independently of the amount of the remittances. We also give the exchange rate e , which
is defined as the home country’s currency price of the host country’s currency,
exogenously.5 Moreover, the exchange rate is assumed to be unique, suggesting that there

4

Even if the representative migrant cannot control the investment ratio precisely, and theactual investment ratio is thereby different from the specified ratio by the migrant, the main
results of this paper remain unchanged.
5This is a simplifying assumption. In general, remittances affect the exchange rate, and theexchange rate affects remittances. Solimano (2003) mentioned the so-called ‘Dutch disease’6

is no exchange spread.
From these assumptions, the income of the representative migrant after sending
remittances can be represented as YM*  R*  CM* . The migrant spends all of this on thepresent consumption in the host country. Remittances after paying the receiving fee are
divided into investment for the migrant’s future consumption k (eR*  CH ) and thehousehold’s present consumption (1  k )(eR*  CH ) . The household spends its earned
income as well as part of remittances YH  (1  k )e( R*  CH e) on its present
consumption.
We represent the direct utility of the representative migrant VM as follows:
VM (YM*  R*  CM* , ke( R*  CH e)) , VM 1,VM 2  0 , VM 11,VM 22  0 , VM 12  0 .
Present consumption and future consumption both increase the direct utility, marginalutilities are decreasing, and present consumption and future consumption are complements,
in the sense that VM 12  0 .

effect. There is a tendency for the real exchange rate to appreciate in countries receiving
substantial remittances. This has negative impacts on non-traditional exports and thedevelopment of the tradable goods sector. Similarly, Amuedo-Dorantes and Pozo (2004)
found that remittances have the potential to appreciate the real exchange rate in thereceiving economies, thereby reducing the competitiveness of their exported goods in theinternational economy. On the other hand, Faini (1994) showed that the real exchange rateaffects the long-run desired level of workers’ remittances. Yang (2008) found that, during
the 1997 Asian financial crisis, the appreciation of the migrant’s currency against thePhilippine peso led to increases in Philippine households’ remittance receipts.

7

On the other hand, the direct utility of the representative household VH depends only on
its present consumption.
VH (YH  (1  k )e( R *  C H e)) , VH  0 , VH  0 .
Present consumption increases the direct utility, and the marginal utility is decreasing.
Since, as assumed already, migrants and households are mutually altruistic, the utility of
the representative migrant UM depends not only on his direct utility, but also on the utilityof the representative household. Similarly, the household utility UH depends not only on
its direct utility, but also on the utility of the representative migrant. Accordingly, the utilityof the representative migrant and the utility of the representative household can be
expressed as follows:U M  (1  M )VM  MU H ,(1m)

U H  (1   H )VH   HU M ,(1h)where M , 0  M  1, is the weight that the representative migrant places on the utilityof the representative household, and  H , 0   H  1, is the weight that the representative
household places on the utility of the representative migrant.
We solve Equations (1m) and (1h) for VM and VH .

UM  (1  M )VM  MVH ,(2m)

U H  (1  H )VH  HVM ,(2h)where  M 

 (1   M ) M (1   H ), H  H
and 0   M  1 , 0   H  1 .
1  M H
1  M H

3. Effects of the Remittance Fee and Its Transfer
This section first examines the effects of the remittance fee on the amount of remittances8and on the interests of agents involved without assuming a transfer of the remittance fee,and then discusses the maximization of remittances under the transfer.
To begin with, we deal with the case in which migrants bear the entire fee needed to send
remittances, and households bear the entire fee needed to receive remittances i.e., the casewithout the transfer.
As assumed already, the representative migrant determines the amount of remittances insuch a manner as to maximize his utility. Making dU M dR * equal to zero, we obtain, (1   M )VM 1  (1   M )VM 2ke   MVH (1  k )e  0 .

(3)

The second-order condition that d 2U M dR*2 is negative is satisfied.
We totally differentiate Equation (3) to derive the effects of the sending fee and thereceiving fee on remittances.

dR*
A

,
*
dCM
A B

(4)

dR*
B

,
d (CH e) A  B

(5)

where

A  (1   M )VM 11  (1   M )VM 21ke ,B  (1   M )VM 12 ke  (1   M )VM 22 k 2e 2   M (1  k ) 2 e 2VH .
Since A, B  0 , Equation (4) suggests that the amount of remittances is decreasing withthe sending fee. Consequently, the sending fee should be reduced if we are to increase theamount of remittances. This result is in line with the arguments made by many researchers.
Reducing the sending fee is beneficial to both the migrant and the household. This isbecause the income of the representative migrant after sending remittances, investment
made by the representative household for the migrant’s future consumption, and the income

9

of the representative household spent on its present consumption become larger as thesending fee decreases.6 This suggests that the migrant and the household will agree toreduce the sending fee.
On the other hand, reducing the sending fee is likely to have negative impacts on thesending agents in the host country because they it might reduce their profits. This suggeststhat the sending agents would not readily agree to reduce the sending fee, even if they wereasked to do so by the home country’s government.
We can infer from these considerations that even if the home country’s government isable to control the sending fee directly, it will be difficult to reduce it because the interestsof agents involved are not consistent.
According to Equation (5), the amount of remittances increases with the receiving fee.
This can be explained as follows. With a larger receiving fee, the household’s present
consumption and investment for the migrant’s future consumption become smaller, leading
to the lower direct utilities of the household and the migrant. In order to avoid reducing theutilities, the migrant has to increase remittances. The arguments made by many researchers
do not apply to the case of the receiving fee because we have to increase the fee to makethe amount of remittances larger.
Although increasing the receiving fee may be beneficial to the paying agents in the homecountry, it has negative impacts on the migrant and the household. This is because
remittances in terms of the home country’s currency after paying the receiving fee become
smaller with increases in the receiving fee, which leads to the lower amounts of investment

6d (YM*  R*  CM* ) d CM*   B ( A  B)  0.

10

made by the household for the migrant’s future consumption and the present consumption
by the household.7 Moreover, the migrant’s income after sending remittances decreases
with the receiving fee.8 These make the migrant’s utility and the household’s utility lower.
Accordingly, migrants and households will not agree to raise the receiving fee even if thepaying agents will agree to it.
Similar to the case of the sending fee, even if it is technically possible for the homecountry’s government to manipulate the receiving fee, it cannot easily increase remittancesby raising the fee because the interests of agents involved are not consistent.
We found that, by controlling the sending fee and the receiving fee in a different manner,
we can increase remittances. However, we also found that, due to the conflicts of interests
among agents, the home country’s government cannot easily manipulate these fees.
Therefore, the manipulation of remittance fees will not be practical as a mean of increasing
the amount of remittances.
Then, how can we increase remittances? We now turn to the case in which the sending
fee and the receiving fee can be transferred between the migrant and the household. In otherwords, we deal with the case in which the migrant bears part or all of the receiving fee, as
well as the sending fee, or the household bears part or all of the sending fee, as well as thereceiving fee.
To examine the effects of the transfer of the sending fee and the receiving fee on theamount of remittances, we assume that the representative migrant and the representative

7

d [e{R *  (C H e)}] dC H   A ( A  B )  0.

8

d (YM*  R *  C M* ) d C H  { B ( A  B )}(1 e)  0.

11

household bear the ratio  and the ratio 1   of the total fee CM*  CH e ( C * ) ,respectively, where  is 0    1 .
~Under this assumption, the utility of the representative migrant U M under the transfer~

and the utility of the representative household U H under the transfer are expressed asfollows:~~~
U M  (1   M )VM   M VH ,

(6m)

~
~
~
U H  (1   H )VH   HVM ,

(6h)

where

~
~
~
~
VM  VM (YM*  R *  C * , ke ( R *  (1   )C * )) , VMi  VMi , VMij  VMij , i , j  1,2 ,~~~~VH  VH (YH  (1  k ) e ( R *  (1   )C * )) , VH  VH , VH  VH .

The representative migrant tries to maximize his utility by manipulating the amount of~remittances. Making dU M dR * equal to zero, we obtain,~~~ (1   M )VM 1  (1   M )VM 2 ke   M VH (1  k ) e  0 .

(7)~

The second-order condition that d 2U M dR *2 is negative is satisfied.
Totally differentiating Equation (7), the effects of  on remittances are derived asfollows:dR * C * .
d(8)According to Equation (8), the amount of remittances decreases with  , and is thereby
maximized when  is equal to zero, i.e. when the migrant does not pay the sending fee andthe household pays both the sending and the receiving fees. The reason can be understoodby remembering that under no transfer, the amount of remittances decreases with thesending fee and increases with the receiving fee (see Equations 4 and 5). We can realize this12

by transferring the sending fee from the migrant to the household.
When there is no transfer, the representative migrant pays the sending fee, which is equal
to CM* (CM*  CH e) of the total fee. Accordingly,  is positive under no transfer.
However, if we allow for the transfer, as mentioned, remittances become larger by making

 equal to zero. Therefore, the amount of remittances is larger with the transfer than
without any transfer.
The home country’s government may be able to realize such a transfer by collecting thesending fee from the household as taxes, and paying it to the migrant as a subsidy. By doing
so, we can make the household bear the sending fee and the receiving fee. However, if
anyone involved in the transfer would lower the utility or the profits, the government could
not realize such a transfer.
Under the transfer, even if the total fee is shared in the different ratios, the income of therepresentative migrant after sending remittances does not change, and remittances after
paying the fee do not change. Accordingly, the migrant’s utility and the household’s utility
do not depend on the way the total fee is shared by these agents. Moreover, the sending
agents are able to collect the same amount of the fee as under no transfer, and the paying
agents are also able to collect the same amount of the fee as under no transfer. As a result,no one will disagree to the transfer of the sending fee from the migrant to the household
through taxes and a subsidy.
Therefore, we can conclude that the home country’s government can realize a transfer ofthe sending fee from the migrant to the household by collecting the sending fee from thehousehold as taxes, and paying it to the migrant as a subsidy, and by doing so, we can attainthe larger amount of remittances.

13

Summarizing the results derived in this section, reducing the fee does not necessarily
increase the amount of remittances. The sending fee and the receiving fee have opposite
effects on the amount of remittances. Moreover, manipulation of each fee has different
impacts on the interests of agents involved in sending and receiving remittances.
Accordingly, even if the home country’s government is able to control the fees perfectly, it
will be difficult to manipulate them to increase remittances. However, by transferring thesending fee from the migrant to the household through taxes and a subsidy, we can increase
the amount of remittances without manipulating the fees and thereby without affecting theinterests of all agents.

4. Concluding Remarks
We showed that, by transferring the sending fee from the migrant to the household, thehome country can receive a larger amount of remittances. Since such a transfer does notchange the utilities and the profits of agents involved, it is feasible for the home country’s
government to impose taxes on the household to collect the sending fee, and to pay it to themigrant as a subsidy to implement the transfer.
Many researchers argue that the remittance fee should be lowered. However, they are notdistinguishing between the sending fee and the receiving fee explicitly. According to ourinvestigation, to increase remittances, we have to manipulate the sending fee and thereceiving fee in a different manner. However, in actual economies, the home country’s
government cannot control these fees perfectly. Moreover, as our model predicts, changing
the fees really has conflicting impacts on the interests of agents. These considerations
suggest that transferring the sending fee from the migrant to the household is more effective

14

than manipulating the fees to increase remittances.

Acknowledgements
This paper was presented at the 8th International Conference of the Japan Economic Policy
Association held in Tokyo, November 2009 and at the All China Economics (ACE)International Conference held in Hong Kong, December 2009. I am grateful to theparticipants for their valuable comments. Needless to say, any remaining errors are my
responsibility.

15

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