Spillover effects of remittances on local public spending in developing economies

We develop a political economy model to study spatial spillover effects of remittances on local public goods with inter-regional positive externalities. Our theory shows that spillovers of remittances are asymmetric with a complex pattern that depends on the degree of externalities of public spending, the inter-regional inequality of income, and whether local public goods are complementary or substitutes. We develop several tests to be verified empirically, for instance our theory shows that if local public goods are substitutes and externalities are moderate, remittances received by households in one locality increase government spending in that locality but reduce spending in other districts. If externalities are significant, remittances affect local public spending in high-income localities but does not affect spending in low-income localities.