Similarly, remittances may well be private receipts for the households receiving them, but if the size and coverage (in terms of the number of households receiving them) of these transfers are large, they could fundamentally alter the economic landscape of the village. The increased economic activity may lead to a greater extent of the market, increased demand for local nontradeable services, and an increase in land rents. All of these changes could potentially further draw labor out of agriculture and cause a complete dislocation of the sector and this would in turn have important implications for land use changes and local natural resources. In addition, the income growth that comes with greater openness may have an independent effect on natural resource extraction.

In this paper, we study the effect of labor migration and remittances on one important natural resource: forests. We build a general equilibrium model of an isolated village economy and theoretically investigate the mechanisms through which the relationship between an outflow of labor, a concurrent inflow of capital and local forest resources would be mediated. We derive predictions from this model and test these predictions using a newly assembled village-panel dataset from Nepal. This dataset combines remote sensing data on land use and forest cover change together with data from multiple rounds of living standards surveys. What makes Nepal an ideal setting for this enquiry is that the country has experienced a sharp increase in rural emigration and this has been accompanied by an unprecedented increase in remittance receipts. On the one hand, the country is overwhelmingly rural with agriculture accounting for roughly two-fifths of the economy. On the other hand, livelihoods of rural Nepalis are linked intricately to forests which are the primary sources of firewood used extensively for cooking and heating as well as fodder (used as feed for livestock). In addition, the widespread perception in Nepal is that forests are declining. These perceptions are somewhat validated in government statistics which show that between 1995 and 2005 land area covered with forests declined from 41 percent to 32 percent.

The effect of out-migration and remittances on agriculture has been studied, among others, by Lucas (1987)and Taylor, Rozelle, and De Brauw (2003). However, these studies are confined largely to issues of agricultural investments, farm productivity, yields and income. More importantly, by treating land as a fixed factor, they are largely agnostic about expansion or shrinking of agricultural activity at the extensive margin. Research on forests in developing countries has typically taken place in the context of economic growth and how it interacts with the demand for forest resources. A particular emphasis has been on the investigation of whether there is evidence of an “environmental Kuznets curve” for forests as has been found for air and water (Grossman and Krueger, 1995). Some examples of rigorous micro-econometric work on this front are Bardhan, Baland, Das, Mookherjee, and Sarkar (2010), Foster and Rosenzweig (2003)and Chaudhuri and Pfaff (2002). However, except Foster and Rosenzweig (2003) none of these papers makes an effort to connect the changes in the consumption of resources such as fuelwood, for example, with actual forest area.

It is generally accepted that greater openness - be it through participation in trade, through expansion of economic activity or through migration to labor markets abroad for work - raises 4