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"Yet an economist should always be suspicious of claims that real-world institutions are inefficient - they have evolved they way they have for a reason."

Yep. Normally, when we say that some practice is inefficient, we explain why people do it despite its inefficiency. Externalities, market power, prisoner's dilemma, etc. So, any economist who asserts that Christmas gift-giving is inefficient does have an obligation to suggest what might be the underlying source of "market failure". Otherwise, our suspicion is that the economist might have left something out of the cost-benefit calculation.

One daughter actually told me what she wanted, but I still have no idea what it is. Some techy gizmo for making movies? Give her cash; tell her to buy the gizmo herself.

A fourth reason is signaling. By giving something to someone else and that person likes that something, you have shown to that person that you care enough about that person by giving that person something that person likes.

When much of what we do is cooperation within the family, firm, society, having information that someone cares enough about you to know something about you is worth something when it comes to future cooperation.

Isn't Christmas about giving, not receiving? What about the utility generated for the giver?

Martin, Jim, two more excellent reasons to question the deadweight loss idea.

Sounds as if Nick lost a golden opportunity to signal his interest in his daughter's high tech projects.

Frances. "Children are given little red enveloppes full of cash". Children yes. Most currency using civilisations forbid implicitly the giving of cash between adults.
A man can dine and wine a lady, take her to a show and hope for the best. He doesn't give her a little enveloppe of cash. We all know the difference...
Wondering about the economic value of a personnal transaction is about as abject as wondering how much your girl-friend would earn on the street.

Martin: "signaling". Spot on! By giving something special, we signal to the recipients ( who know they are different from the non-recipient) that we have enough resources we to protect them. That'a potlach that he victorian missionaries tried to destroy. Either they forgot that the Queen-Empress held magnificient pageants ( ot they wanted to shift the Natives loyalty to the Great White Mother.
That's the "two months salary " rule for engagement rings.Which is why gifts can be too extravagant. Showing you have the resources show your leadership. Squandering them show bad judgment.
Concentrating about the "inefficiency" forgets that ant trade is a relationship, inasmuch as you need trust to conduct trade and not everyone qualifies.
There is also the value of time. Especially for rich people. We all now these movie scenes where the businessman ask his secretary to buy a gift for his wife,children or even his mistress. We all go "Urgh!" as the guy exhibits his villainy.
For Warren Buffet or Bill Gates,giving a million dollar diamond to their wives could mean nothing.
Doing their own shopping means a lot. BTW, by all accounts they are both devoted husbands and it may have something to do with the public trust and affection they enjoy.

Anyway, a Mafia guy asks his moll what she wants for Christmas
"For once, I'd like something you made yourself" she coos.
"Ok , I'll give you money".

Martin: signaling . Spot on!
Frances: " children are given enveloppes full of cash" Children yes. Adults no. Most currency using civilisations implicitly forbids the giving of cash between adults, at least most of the time.
A man can wine and dine a lady , take her to a show and hope for the best. He doesn't give her an enveloppe. We all know the difference.
There is a potlach aspect. Giving to somebody establish that we have the resources to protect them. The choice of recipients and the fact that recipients and non-recipients know theit position is significant.
No wonder the victorian missionaries tried to stamp out potlach. Forgetting,or not, that the Queen held magnificient pageant to her glory. The point was to show the benfit of transferring your loyalty to the Great White Mother.
That's the two months salary rule for engagement rings.
A gift can be too much. Showing you have the resources to protect your group is good. Showing that you squander these resources show bad judgment.
A gift is a social relation. Estimating an economic value is as abject as wondering how much your girlgriend would earn on the street.
There is the value of time. We all know these movie scenes where the guy ask his secretary to buy a gift for his wife-children-mistress. We know he is a scoundrel.
For Bill Gates or Warren Buffet, giving a million $ diamond means nothing . Doiing theit own shopping means a lot. BTW, both are known to be devoted husbands . It may be related to the public trust they enjoy.

A Mafia guy ask his moll what she wants for XMas.
"For once, I'd like something you made yourself" she coos.
"Ok. I'll give you money."

There are two of Jacques' comments stuck in the spam filter.

When I copied and pasted them in, it put *me* in spam!

The spam filter has got nothing against you personally Jacques, but it really doesn't like the content of your comments! (I thought they were rather good.)

Frances, the reverse of your first point could also be true. Some gifts are more valuable in the short run, and not in the long run (e.g. chocolates, gag gifts). However, it might still support your case: if Waldfogel asked his students about their valuations several days after Christmas, they may be reporting valuations significantly lower than what they would have experienced on Christmas.

Also, it seems strange that one would want to omit the sentimental value of gift giving. As Jim Sentance points out in a comment above, both the giver (and receiver) likely receive some utility from the thought that went into a gift (personally, I receive more utility from an actual gift, even if it's not exactly what I wanted, than a gift card). Even if there is some monetary deadweight loss, it can really be the thought that counts.

Finally, there's one more argument that could support your case, which Dan Ariely talks about on his blog (http://danariely.com/2011/12/17/is-it-irrational-to-give-gifts/). Sometimes, we receive something we really want, but that we would never buy for ourselves because it is so frivolous we'd feel guilty buying it (Ariely talks about fancy pens; my guilty pleasure is hockey cards). For these gifts, one's "maximum willingness to pay" may be less than their "valuation" of the gift (i.e. the raw utility received), since buying the gift for oneself would also be accompanied by a feeling of guilt (i.e. disutility). But if the feeling of guilt does not arise if the gift is received from someone else, then the receiver's valuation of the gift could exceed their maximum willingnesss to pay.

David: "Sometimes, we receive something we really want, but that we would never buy for ourselves because it is so frivolous we'd feel guilty buying it"

That's what I was getting at with the third point in the post - without some excuse to buy luxuries once in a while, it would be impossible to sustain a "no luxuries on an everyday basis rule."

Frances. "Children are given little red enveloppes full of cash". Children yes. Most currency using civilisations forbid implicitly the giving of cash between adults.

This is not quite true. The Chinese practice of giving red envelopes of cash is generally from married adults to children during Chinese New Year, but red envelopes are given between adults on other occasions - during traditional "dragon dance" to the performers (which may be New Year-related or simply to mark an opening ceremony, corporate anniversary celebration, etc.), or at weddings (from adult attendees to the adult newlyweds), to social leaders (religious leaders, teachers, doctors), as a ceremonial payment of 13th month bonuses, etc.

Interestingly, Wikipedia suggests that in Southeast Asia, the practice of giving cash as small gifts has spread to Muslims in the region, taking off from the religious practice of giving gifts in-kind as alms.

Just have to comment that according to the CBC radio program, Age of Persuasion, the De Boers diamond company invented the "two month salary" rule for engagement rings as part of a marketing campaign - it is not a social convention that arose "naturally' in the sense of generated from broad social standards over time.

Frances, really interesting post.

I think that the best answer by far (way far) is the utility of the giver argument.

Your 3 suggestions, while all relevant to economic behaviour are far too relevant! They'd be ubiquituous and it seems pretty clear that a once a year gift giving tradition isn't the best solution to those behavioural quirks.

On the other hand, 10 - 30% is not a huge discount, probably on the order of the consumer surplus we normally capture in the stuff we buy ourselves. It's very easy to believe that the gift giver derives enough satisfaction to cover that.

On the other hand, that explanation does seem to suffer from the defect that if the gift giver's satisfaction exceeds the discount then why don't we see gift exchanges on the scale of Christmas on an continuous basis?

I would suggest then that if the gift giver's satisfaction is enough to make up for the discount so that the exchange is a net welfare improvement then the real role of Christmas is to solve a coordination problem.

After all, if the gift givers satisfaction is valued at 30% of the gift value and the discount the receiver applies is less than 30% then it's still the case that both parties are better off if they each give each other a gift, each needs to receive a gift and give a gift.

Thus the role played by Christmas (and days like Valentine's day) is to coordinate the gift exchanges without the need to do something like saying "we agree to exchange gifts on the first Wednesday of each month..." which would just ruin it.

PS: And the thing about Frances' 3 suggestions is that because they'd be ever present in our lives, if gift giving was a way to improve on the outcomes that these behavioural quirks cause then you would expect it to be quite common to have bi-lateral agreements to the effect of: we each buy each other a gift on the first of each month.

As anthropologist have demonstrated Christmas and other potlach-style gift-parties are always about mutual debt. Introducing deadweight analysis (or short-term cost-benefit) to this issue is like using the general theory of relativity to the study of a chemical reaction. Not impossible or without merit... but completely useless :)

Merry sol invictus

As David above says "Apart from any sentimental value of the items" does have an "Apart from that Mrs. Lincoln" flavour to it.

I like the regulating consumption idea although I think that is a better fit to Lent/Easter. One argument I have heard made in some blogs is gifts allow some redistribution. Imagine an artist in a family of bankers. It is an opportunity for the wealthier to treat the less well-off to some luxuries without awkwardness. A $20 book is "traded" for two tickets to a hundred-dollar show. Everyone wins in this trade - the artist who probably knows better what great books are out there spreads their cultural wealth and the well-off spread their ability to enjoy luxury.

Adam P - thanks!

On the utility of the giver argument. Economists have this idea of "caring preferences". A parent's utility depends upon a child's utility, i.e. Utility of parent = f(parent's consumption, utility of child) where f = some function. An altruistic parent who respects his/her child's preferences should, if she really cares for her child, give cash.

The fact that I didn't give cash suggests that I'm not purely altruistic. I'm paternalistic (or, I guess, maternalistic) - I want what is on their long-term self-interest, not what they want.

So the utility of the giver argument has a lot in common with the merit good argument.

Where utility of giver is not equal to merit goods is where the utility the giver gets depends on some kind of future expectation of reciprocity, or some strengthening of social ties, as others have pointed out.

I'll try to write something more coherent in a few hours.

Melissa: the two months meme is indeed an advertising creation from De Beers. But it caught on. Unlike the Ford Edsel and the Pet Rock. It was found to have some value.

david: when the elders give cash to newlyweds, it is still to youngers ones.As for giving cash to leaders? When Luca Brasi gave money to the Godfather to hand back to his daughter, it was both a gift to a young one and and a tribute the the powerful... And tribute is better paid in species than in goods.( meilleur en espèces qu'en nature as we say in french...)

@Jacques René Giguère - I think you're moving the goalposts here... this is, fairly indisputably, gifts in cash between adults, sometimes from a high-status to a low-status individual or vice versa. Characterizing, say, door gifts during social events (between equals) or bonus payments (from high to low in a management ladder) as tributes to the powerful or to the young is frankly odd.

Nice posts. However I would add another point, you already meant in one of your previous comments. Gifts can be generally used as a form of "investment". For example children generally cannot give their parents gifts in proportion of what they receive, but by maintaining the tradition they will in their own time give gifts to all children in their family.

So now the question is between two options - give "cash" gift or buy something? I for once was involuntarily part of something that was basically cash exchange Christmas. Several people in my family (including me) ordered what they wanted online, but everyone in family except them were paying for that "gift". Then came this weird moment when money "obligations" were settled after the dinner. The eurobills passed several hands until it eventually ended up in the hands of the person that used her credit card for the online purchase. At the end, everybody felt awkward and almost everyone would prefer no gifts to this pretense. This is how the loss of the utility stemming from genuine gift feels. Remove it and you will still end up with deadweight loss of disutility and discomfort from embarrassment.

And the last thing - even if I receive a lot of crappy presents I would probably never bought myself, from time to time I am proven wrong. Sometimes these unexpected presents turn to be quite useful. And this surely carries positive surplus over the utility you derive from these presents themselves. Discovery of a new and good writer, finding a excellent vine vintage or even having your childhood photos developed and neatly ordered in an album (a thing that you would never find a time for otherwise) can be nice examples of what I am talking about.

J.V. - love that story!

Jacques Rene - your points on cash gifts are interesting. I agree that it is rare to see exchanges of cash between social equals. So perhaps the relative presence of of cash v. in-kind gifts is a measure of the extent of social hierarchy? I.e. if an aunt is at a higher place in the social hierarchy than an adult niece, then a cash gift may be acceptable. But if aunt and adult niece are in an equal place in the social hierarchy, then a cash gift seems uncomfortably transactional.

Adam P: "why don't we see gift exchanges on the scale of Christmas on an continuous basis?" One reason might be that we just don't need them that much - we're talking small-ish market failures/corrections here.

What about the gifts pet owners give their pets? Some gifts the pets like (let's say a bone or a toy) but sometimes the gift is a kitty sweater or a dog collar that the pets dislike. Clearly in this case, the gift is all about the giver's utility. There's no expectation of reciprocation, there is no utility obtained through the utility gained by the recipient, so I guess that only leaves paternalism.

When I was growing up, many of the 'gifts' I got were essential items for school like geometry boxes, notebooks, or pen and pencil sets. Actually, with so little money for luxuries, I guess that was an optimal allocation of resources. I remember, during my parents' anniversary, my dad would buy my mom some household appliance (let's say an iron) and my mom would buy my dad some other household appliance, say a water heater. This meaningless gift exchange between our parents amused us kids to no end except when we got such 'utility' gifts as well. The odd thing is that my parents appeared to somehow increase the utility derived from those objects by frequently referring to their special status as 'gifts'. Somehow, the water heater bought as a gift held a special status compared to the non-stick pan bought as a regular household purchase.

primatedprimate - geometry boxes were exactly what I had in mind when I was talking about consumer durables, I was just too embarrassed to admit to buying a stapler and a 3-hole punch as a Christmas gift.

Have to think more about the household appliances.

On Chinese Spring Festival gifts - I had a long conversation about these today with someone who grew up in China. A couple of interesting aspects of these gifts:

- the recipients don't necessarily get to keep the cash. The person I was talking to had to give her spring festival gifts to her mother, who took the money and saved it for her. From a child's point of view, a toffee apple that one actually gets to eat might be better than $100 that is given to parents and saved for the future.
- Spring Festival gifts allow for fairly obvious differential treatment of, say, grandchildren. E.g. giving grandsons more than granddaughters, giving a favoured granddaughter more than a less favoured granddaughter. Since kids talk and say "how much did you get?" such differential treatment becomes readily apparent.

david:I am not moving goalposts. We may be playing in different stadiums.
Bonus are transactionnal. Either payment retained through the final accounting is completed or more usually a show by the powerful that they give it at their discretion, on good behavior.Cash to the less powerful ( the youngs say) may also entail something else. By letting them buy what they want, we give them an autonomy they don't usually have. It's powerful mojo. And there is also the fact that old uncles may be esteemed for their advices ( and each of my nephews and nieces is very proud of their "special uncle" aka godfather) but esteemed as I may be, I am totally clueless about what please a 12-year old boy and even my personnal deity can't do anything to help me about my niece's desires.

I think one advantage of gifting a durable good (such as a household appliance or even a diamond) over gifting cash is that the former is indivisible, unique, and long-lived. Even when the gift itself is rather commonplace (a water heater) and provides no greater utility than another comparable good (non-stick pan) purchased as a regular item, a gifted consumer durable stays around and serves as a reminder of a happy moment. A cash gift, due its fungibility, non-uniqueness, summability, and divisibility, can simply be added to a bank account from which all kinds of expenses can be paid - even if something permanent is bought with the money in the account, the memory of the gift is lost for good.

So I guess some utility for gifts comes from the fact that they can serve as mementos of a happy moment for the giver and the recipient - that's something monetary exchanges cannot provide.

The water heater was not just something my family used everyday -it was also something that reminded my parents every once in a way about their happy marriage!

Chrismas is great. Festive shopping for 1 month. Sad reflection after bills come in. Time to forgetadebt for those products = more happiness.

We consume anticipation when we unwrap a present. Watch a kid look at a stuffed stocking on Christmas morning, then watch them try to relive the experience by placing their gifts back in the stocking and repeatedly taking them back out again.

Perhaps the exchange of gifts could be modeled as if the participants are entering into an agreement of a sort of shared lottery. We each agree to give each other something random with a certain value. But there is a difference between gift giving and lotteries--there is insurance in the gifting market: gift reciepts.....


Carina - thank you!

Allan: "Perhaps the exchange of gifts could be modeled as if the participants are entering into an agreement of a sort of shared lottery."

Interestingly, large families, e.g. my brother-in-laws, not uncommonly replace giving-gifts-to-everyone with a lottery where each person's name is thrown into a hat, everyone draws one name and buys a gift for that person - so each person gets one big excellent gift instead of multiple crummy gifts.

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