Inter-household transfers: An empirical investigation of the income-transfer relationship with novel data from Burkina Faso

Households in rural areas depend on informal transfers to meet subsistence needs and cope with shocks. Yet, to provide monetary support, formal safety nets are increasingly being introduced in developing countries. However, it remains unclear whether such social-protection policies will have the desired redistributive welfare effects. This article addresses this question from an ex ante perspective by analyzing the private-transfer response to changes in the income of rural recipients in Burkina Faso. We use novel dyadic household panel data from two periods that offers information on both recipient and sender incomes. This allows us to address the endogeneity concerns that other studies have thus far not been able to account for. Our hypothesis is that the transfer-income relationship is nonlinear and that transfer motives, and therefore also transfer responses, vary with the recipient's position within the income-distribution. Our findings support this view. We find a pronounced, negative private-transfer response among the poorest of the poor. This observation has important policy implications: those households that depend most on private transfers are the ones most likely affected by crowding-out effects. The negative relationship for the lowest income class is consistent with transfers being altruistic in nature. Furthermore, we observe, that with increasing income levels, transfers cease being altruistic suggesting that then exchange motives dominate. Yet, the observed transfer pattern is also indicative of an (informal) insurance role of private transfers. Rural households receive higher private transfers in response to negative shocks. These results can serve as a basis for the design of formal social-protection mechanisms in a context where informal redistribution still plays an important role.