Introduction

Whatever workers may take with them when they migrate, they cannot possibly transfer their home country's information structure. Consequently, foreign-country employers are not as well informed about home-country workers as are home-country employers. Typically, migration runs across cultures as well as countries. Foreign-country employers who do not share the culture, background, and language of migrants as do home-country employers lack a common framework for assessing the quality and individual merits of migrant workers. For these reasons, the skills of migrant workers cannot be easily discerned, and screening is likely to be imprecise and expensive. In mainstream migration research, incorporation of the natural assumption that migration is inherently associated with a heterogeneous information structure (as opposed to the homogeneous information structure that characterizes nonmigrant employment relationships) has, somewhat surprisingly, been an exception rather than the rule (Kwok and Leland, 1982; Katz and Stark, 1987,1989; Stark, 1991,1995).The relative ignorance of foreign employers should not be taken as a constant, however. Exposure breeds familiarity, and increased experience with employing migrants is bound to reduce information asymmetries. Such a change can entail interesting dynamics. For example, the accumulation of information erodes both the pooling of low-skill migrant workers with high-skill migrant workers and the associated wage-determination rule (viz., paying all migrants the same wage, based on the average productivity of the entire cohort of migrants). Absent pooling, however, low-skill migrant workers may find it advantageous to return-migrate (Stark, 1995).

Introduction

The first three lectures-turned-into-chapters in this book implement the idea that economic methodology is helpful in understanding the motives for and the repercussions of transfers and exchanges even if they take place outside markets. Although it may seem odd to think of a family environment as a “marketplace,” or of family members in their relationships with each other as market agents, it is quite natural to use an economist's lens to view the ways in which the preferences and actions of one family member impinge upon and modify the choice-set, the behavior, and the wellbeing of another.

Chapter 1 investigates the relation between the allocative behavior and wellbeing of one family member and his altruistic link with another. Chapter 2 explores how the timing of the intergenerational transfer of the family's productive asset affects the recipient's incentive to engage in human capital formation. Chapter 3 sheds light on the way in which transfers from an adult to his parents impinge on future transfers to him from his own children. Each chapter also traces at least some of the ensuing market repercussions. Chapter 1 refers to a disincentive to transact in anonymous markets arising from altruistically-motivated automatic trans-fers between altruistically-linked family members; chapter 2 considers the effect of individuals' human capital investment decisions on economy-wide per capita income; and chapter 3 suggests that the benefits that accrue to particular family members from engaging in intrafamilial transfers could account for the fact that they have a lower rate of participation in the labor market. Economics (narrowly defined) thus provides the tools but also reaps some gains from their use.

Reading Oscar Morgenstern's fascinating work on what constitutes proper economic research persuades me that he would have approved of the theme and approach of this book: economic methodology (seasoned with a little mathematics) applied to a study of the motives that underlie the behavior of agents as family members and as members of distinct groups.

Lectures published in this book not only address transfers but also, to a great extent, emanate from transfers. To begin with, all six lectures-turned-into-chapters benefited considerably from searching questions raised by colleagues and students who attended the lectures in Vienna. Chapter 1 owes much to the comments and suggestions of Kenneth J. Arrow, Gary S. Becker, Theodore C. Bergstrom, and Paul A. Samuelson. Chapter 2 is fully due to collaboration with Oded Galor. Chapter 3 is fully due to collaboration with Donald Cox, enriched by Richard Arnott, Gary S. Becker, Theodore C. Bergstrom, and Zvi Griliches. Chapter 4 owes a debt of gratitude to Donald Cox for his invaluable input. Chapter 5 is freer from ambiguity as a result of advice offered by Robert J. Aumann and Ian Molcho. Collaboration with Theodore C. Bergstrom gave rise to chapter 6, the refinement of which is due to comments by Carl Bergstrom, Gary S. Becker, Jack Hirshleifer, and Andreu Mas-Collel.

The conversion of lecture notes into a published volume can be – but was not – a joyless undertaking, because of the encouragement and support I received from Bernhard Felderer, the advice and help I received from Christian Helmenstein, and the dedicated and skillful assistance of Isabella Andrej, and Elinor Berg.

Introduction

The modeling of migrants' remittance behavior is of interest for four distinct reasons.

First, remittances are of a gigantic magnitude. Two examples serve to illustrate this. In 1980 workers' remittances provided as much foreign exchange as exports did for Pakistan and Upper Volta, more than 60 percent of exports for Egypt, Turkey, and Portugal, and about 40 percent of exports for Bangladesh and Yugoslavia (World Bank [1984]). The International Monetary Fund estimates that in 1990, remittances into 38 labor-exporting countries amounted to US$33.8 billion (Elbadawi and Rocha [1992]). This must, however, be a lower bound because remittances through “unofficial” channels are not included in this estimate. There are many more rural-to-urban migrants in developing countries than there are international migrants from developing countries in more developed countries, and as a general rule, internal migrants frequently tend to remit to their families back in the rural areas about 30 percent of their urban-earned income (Stark [1991]). Even though the absolute sums remitted by internal migrants are considerably smaller than the sums transferred by international migrants, the considerably larger number of internal migrants implies total internal remittances running into billions of dollars.

Second, predicting remittance response to perturbations either in the incomes of recipients of remittances or in the incomes of remitters is sensitive to the motive for remitting. Policy choice is likewise sensitive. To illustrate, consider altruism versus exchange. The altruistic hypothesis of remittances predicts that remittances received and recipients' pre-transfer income would be inversely related. In other words, altruistic migrants react to recipients' income shortfalls by remitting more.

Introduction

A fairly strong positive association exists between per capita income and life expectancy across developing countries. Even though associations do not reveal causality, in this case one explanation of the association is as transparent as the association itself: countries that master means and resources to provide more and higher-quality health and health related services end up having longer-lived residents. The possibility that causality runs in exactly the opposite direction, that is, that longer life expectancy translates into higher per capita income, is less well recognized. This possibility is taken up in the current chapter. Specifically we study the chain that longer life expectancy encourages larger investments in human capital which in turn facilitates the attainment of higher per capita income. Although in itself this chain is not novel, the proposed microeconomic rationale which underlies the observed macroeconomic relationship is.

When education and skills are more abundant, countries produce more. Although the close link between investment in human capital, per capita income, and growth is well documented (e.g., Lucas [1988], Romer [1990], Azariadis and Drazen [1990], Ehrlich and Lui [1991], Mankiw, Romer and Weil [1992], Galor and Zeira [1993]) the underlying mechanism is not yet fully understood. Becker, Murphy and Tamura (1990) have suggested an explanation that draws on the role of fertility behavior: higher fertility is assumed to raise the rate of discount in the intertemporal utility function, thereby discouraging investment in human capital.

Introduction

Recent evidence indicates that private intergenerational transfers of income, wealth, and in-kind services are motivated, at least in part, by exchange considerations. For example, parents attach strings to money given to their children and transfers are made with the expectation of future repayment. Evidence supporting the idea that intergenerational transfers in the family are motivated partly by self-interest is contained in papers by Lucas and Stark (1985), Bernheim, Shleifer and Summers (1985), and Cox (1987).

Despite evidence supporting the existence of an exchange element in private transfers, we do not know much about the mechanisms that sustain and enforce these two-way transactions. Enforcement of intergenerational exchanges has hardly been explored in economics. One possibility is that enforcement comes from explicit incentives: economic punishments or rewards. Bernheim, Shleifer and Summers offer evidence that the threat of disinheritance induces children to provide attention to their parents. But monetary mechanisms may not always work. Suppose a parent lends to his child, expecting repayment in old age. If anticipated future bequests motivate behavior only mildly, or not at all, the parent may have little economic leverage for enforcing an implicit long-term contractual arrangement.

Introduction

A plausible evolutionary argument for selfishness would assert that if natural selection favors those who receive high payoffs, and if altruists get lower payoffs than selfish individuals, then evolution will tend to eliminate altruists. In this chapter, we will show that, paradoxically, evolution can sustain cooperative behavior between relatives even in single-shot prisoner's dilemma models, where cooperation benefits one's opponent at a cost to oneself.

We consider two-player, two-strategy games in which a player who cooperates gets a payoff of R if his or her opponent cooperates, and S if the opponent defects. A player who defects gets T if his or her opponent cooperates, and P if the opponent defects. In a prisoner's dilemma game, S < P < R < T, so that defection is a dominant strategy for each player, and S + T < 2R, so that total payoffs are maximized when both cooperate. An individual's strategy is determined either by genetic inheritance or by imitating the behavior of parents or nonparents.

The evolution of genetically-transmitted behavior toward siblings

Not much is known about the environments that shaped our genes, and most economists do not believe that evolutionary hypotheses can explain human preferences. But since the fundamentals of mating, childrearing, and sibling relations have changed little over the millennia, we believe that evolutionary theory can enrich the study of the economics of the family.

Introduction

In all economies, but particularly in less developed countries, a considerable proportion of resource transfers takes place outside the realm of the marketplace: inside families, within households, and among members of kin group or caste. Often it is not all that clear what exactly these transfers “buy”: we do not see commodities moving in the reverse direction nor do we observe a flow of easily definable services. For example, households in rural India “purchase” insurance against variability in consumption not from insurance companies but from other households whose sons marry their daughters, and whose incomes exhibit low covariability with their own (Rosenzweig and Stark [1989]). Such actions are different from typical marketplace exchanges where the transfer of a commodity from A to B is accompanied by the transfer of another commodity from B to A and where one of the exchangeables is money, so that it is quite clear what is being bought – and at what price. It is generally argued that nonmarket intragroup transfers are mandated by the insufficient development of markets and that as development proceeds, a larger share of transfers and exchanges is relegated to the marketplace. This reassignment is believed to hasten the pace of economic development as the scope for exchange and trading opportunities increases. This, in turn, should feed back into the production opportunities set by facilitating increased specialization and recourse to comparative advantage.

The precise mechanisms that generate nonmarket transfers have not so far been well explored.