Mental Accounting and Remittances: A Study of Malawian Households

This paper examines the role of remittances in consumption and savings choices amongst households in Malawi, specifically looking at whether households use ‘mental accounting’ when consuming different categories of goods.

The paper proposes that mental accounting explains the observed differences in the marginal propensity to consume out of remittance income rather than other income sources. It argues that:

• Households keep different financial accounts out of which different goods are consumed,
• They place income in one account or another depending partly upon its source,
• Remittances sometimes come with conditions for their use,
• They are also used as a form of income-pooling, mutually reducing risk and helping to smooth consumption,
• Remittances may be used to encourage investment in ‘useful’ areas such as education, health, nutrition and savings.

The paper uses a 1998 cross-sectional data and finds that:

• Mental accounting systems are in operation,
• Remittance income exhibits a high marginal propensity to save,
• Household income influences consumption habits,
• Receipt of remittance income impacts on spending and saving habits,
• Both remittances and loans are used for consumption smoothing and investment purposes.

It concludes that:

• Remittances should be encouraged in Malawi since they encourage savings and consumption of education.
• Since remittances are also used to fund the consumption of food and household goods, current projects to help reduce the costs of remittances are a step in the right direction.