Gift Giving

Your last gift. What was the last gift you received (money counts)? Who gave it to you (parent, grandparent, friend)? What would you estimate the price the person paid to buy it? What is the amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift? Why do you value or not value this gift?

Todd’s Worst Gift (received) Wedding Gift from his friend Marc. A large, heavy crystal eagle from Tiffany’s. Was given to me in NJ when I lived in overseas. (High transportation costs.) It wasn’t particularly elegant. Luckily, I was able to trade it in for silver spoons. Problem is that Marc still bugs me about trading it in.

Waldfogel 1993 asked a similar question. The % yield of a gift is (value/price)*100. Price range% yieldStandard error N $0-$ $26-$ $51-$ Over $ Overall Average yield of non-cash gifts.

Welfare loss Waldfogel concluded that Dead weight loss between $4 billion and $13 billion for 1993 xmas gifts. Americans spent $137 billion on non-cash gifts to non-household members alone in This is 2.4% of total consumer expenditures, according to the Bureau of Labor Statistics’ Consumer Expenditure Survey.

Deadweight loss. Initial endowment After gift For same price could have had. Loss

Three questions Types of givers: –Aunts/uncles, parents, friends, grandparents, siblings, significant others. Who gave the most (or least) expensive gifts? Who gave the highest (or lowest) yield? Who was most (or least) likely to give cash?

Who gave what. Who gavePrice paidYield% cash Parent$ %10% Grandparent$ %42% Aunt/Uncle$ %14% Sibling$ %6% Friend$ %6% Significant Other$ %0%

Why is there gift giving? Take a minute to discuss with you neighbor as to why people give gifts. Reasons:

Why? Psychological reasons and economic reasons. Why is there a psychological value? Shouldn’t “evolution” get rid of it? There is an economic loss to gift giving. Could it ever make economic sense? Could it ever make sense to give a gift rather than money?

Reasons for valuing the gift. Reason# /155 The gift showed a lot of thought50 Wanted but felt shouldn’t buy it for self50 Wanted but never remembered to buy22 Wouldn’t have wanted to shop for it.20 Wouldn’t have bought but may grow to appreciate it. 19 Giver has better taste than oneself.18 Item is not readily available13 You didn’t know this item was available6

Some economic reasons Insurance: weddings, hunter-gatherers. Intergenerational loan. Paternalistic. Is this economic? Search: –Giver has better taste than oneself. –Item is not readily available –You didn’t know this item was available –Wouldn’t have wanted to shop for it. –Wanted but never remembered to buy

Todd Kaplan and Bradley Ruffle (2008) "In search of welfare-improving gifts". Motivation claim that gift giving is welfare reducing rests on several assumptions: 1)the giver does not perfectly know the recipient’s preferences. 2)gifts cannot be costlessly refunded. 3)gift recipients possess full information as to whereabouts of goods they desire 4)gift recipients are able to obtain such goods costlessly Kaplan and Ruffle (KR) break with this literature by relaxing assumptions 3 & 4 1) they add uncertainty about the existence & location of goods and 2) search costs to resolve this uncertainty importance of search-cost savings in modern gift giving can be heard in common expressions of gratitude upon receipt of a gift: "where did you find it? I've looked all over for this item."

Simplified Model There is a giver and a receiver. The giver is at a store and has to decide whether or not to buy a gift for the receiver. The receiver would have to spend c to visit the store. The gift costs p to purchase. There is an α chance of the good having value v (>p) to the receiver (otherwise it is worth 0).

Two ways of getting the good Shopping: the receiver travels to the store and buys the good, the social benefit is α (v-p)-c Gift Giving: the giver gives the good to the receiver, the social benefit is α v-p When is gift giving better than shopping? α v-p> α (v-p)-c Or c>(1- α )p Thus, we have gift giving if c>(1- α )p and α v>p Gift giving is better than shopping Giving is not waste of money

Interpretation of requirements Gifts when c>(1- α )p and α v>p Grandmother effect: when α is low, give cash since α v<p. When α is high, gifts are better option than buying it oneself: best friends. When c is high, gifts are better. v doesn’t affect which method is superior. Examples: what is the social value of gift giving, α v-p, and shopping, α (v-p)-c, when (c,v,p,α)=(1,2,1,.6), (1,3,1,.6),(1,6,2,.3),(1,8,2,.3) gg>0>shop, gg>shop>0, shop>0>gg, shop>gg>0

Why not trade instead of give? Can’t the giver simply make a profit buying from the store and selling to the receiver? In such a case, the receiver would only buy the good if it is worth v (with probability α). The receiver would bargain to purchase the good for a price less than v (buying at v would leave him indifferent). Go back to (c,v,p,α)=(1,2,1,.6). If the giver spends 1, and sales it to the buyer for 1.9 (<v=2), he would on average receive 1.14 for a profit of.14. How much must the giver get from the receiver in order to make a profit? –X*α-p=>0

Why not trade instead of give? We can interpret our model as an information acquisition model. (Example: Marc buys grandma a computer.) The giver knows more than the about the good. The giver knows this is something the receiver potential wants (with prob α ). The giver may at other times see other products with lower α. The cost c is what it costs for the receiver to learn whether it is something he wants. Trade would not solve this basic problem, since the receiver would still have to spend c and without doing so the giver would have incentive to push unwanted products. (The stereo/car/fashion salesman.)

Need to go to lab Two groups. FEELE lab. –Group A: 12-1 pm. –Group B: 1-2 pm.

Homework. Homework: go to the webpage: people.ex.ac.uk/trkaplan/issues.html. Read the news articles and listen to the two radio shows.