hosuehold incomes. In settings in which dependence on forests for livelihoods is large, it is natural to expect the increase in incomes to manifest itself through either an increase or decrease in the consumption of forest goods (such as firewood) depending on whether they are normal goods that complement other aspects of consumption or if they are inferior goods that lose favor as households modernize. In large parts, the “Kuznets curve” literature of forests has concentrated on determining the exact shape of this relationship. A bigger challenge is to extend this analysis a step further and consider how this increase or decrease in household demand for forest commodities will affect the size of the forests. Clearly, the local resource management regime in place plays an important role. In India, as Foster and Rosenzweig (2003) show, an increase in the demand for forest resources led to a greater allocation of land for forests. However, it is not hard to think of regimes under which the opposite would be true.

This paper contributes to two distinct bodies of research. First, given the fact that the overall growth in rural incomes is one of the most direct consequences of the growth in remittances, this paper adds to the small body of micro-econometric research that studies the impact of openness and economic growth on forests, particularly making an explicit linkage between an increase or decrease in the demand for forest products on actual forest area. In addition, we also add to the growing literature on the impact of remittances. This literature has focused primarily on private outcomes of households receiving these remittances and has, by and large, remained agnostic about broader, economy wide effects of the spatial mobility of labor. By bringing a general equilibrium perspective into the analysis of the relationship between remittances, local economic conditions and local commons, we hope to capture a richer and a more complete set of interactions that define the impact of remittances at the local level.

Empirically, one of the challenges we face in identifying the effect of remittances on forests is the possibility of reverse causality, that is the possibility, for example, that the villages that suffered adverse environmental shocks that caused a decline in forests were also the villages that witnessed the largest emigration and consequently the largest inflow of remittances. However, a large variation in remittances in the period we study was caused by a diversification of migration destinations which was in turn an upshot of a number of plausibly exogenous central government policies, particularly those regarding restrictions on foreign employment. We exploit this unique feature of the Nepali setting to deal with issues of bias. To be precise, we create a “synthetic remittance” variable that captures how per capita remittances in each village would have evovled had the diversification of migration destinations been the only thing to change in the migration patterns between the time periods we study. This generated variable serves as an instrument for true remittances with the underlying identifying assumption being that the diversification of migration destinations at the village level was truly exogenous to village circumstances and was driven largely by policy changes at the national level.

The rest of the paper is organized as follows. In Section 2 we describe the context, the history 5