This paper tests the hypothesis that in a context of 'bad governance', remittance inflows strongly reduce public spending on education and health in receiving countries; a phenomenon called the 'public moral hazard problem'. Using a large sample of 86 developing countries over the period 1996-2007, and after factoring in the endogeneity of remittances, the results suggest a negative impact of remittances on public spending on education and health, when governance is bad in remittance-dependent economies.