Any kind of holiday season influences the types of goods bought and sold, as well as the level of consumer spending.
For instance, December typically sees £700 more consumer spending per person, compared to other months.
Yet there are other fundamental economic questions here.
Why do people give gifts? How can we explain gift-giving in terms of economics?
A neoclassical view of gifts
There’s an obvious economic problem with gifts.
Scenario A
First, suppose someone produces a chocolate bar and is willing to sell it for £1.
Also suppose the consumer is willing to buy the chocolate bar for £2.
If the seller and buyer can agree a price between £1 and £2, then both the buyer and seller are better off.
Scenario B
But gifts add a layer to this problem.
Specifically, the buyer and the consumer are now different people.
Now, suppose the consumer only values the chocolate bar at 50p. The seller is still willing to sell at £1.
The buyer could buy this chocolate bar, say, for £3.
However the buyer cannot perfectly observe how much the consumer may value the chocolate bar – they may guess / estimate incorrectly.
Comparing scenario A and B
This results in a chocolate bar being sold, that otherwise would not be sold if the consumer was also the buyer.
In short, gifts can be disappointing to the final consumer. Alternatively, other gifts, that may have been more desirable to the consumer, are not bought instead.
James Waldfogel argued Christmas can lead to a “deadweight welfare loss” as a result.
The difference between the price paid and the value the end consumer assigns to the good could be 10% to 30% of the price paid. Gifts may be regifted as a result.
Note this analysis is very narrow. The point here is to highlight the reason for gift giving is not straightforward.
In fact, there could be several entirely rational reasons why people buy gifts for others.
So, why do we give gifts?
Giving gifts shows the limits of the standard neoclassical economic models.
Here are a few possible other explanations for why we give gifts:
- Pure altruism. Buying a gift because it makes someone else happier.
- Demonstration of effort or knowledge of the individual. The more closely the present aligns with the recipient’s interest, the better it may help to build a business or personal relationship.
- Demonstration of wealth (showing off one’s ability to pay for gifts). “Keeping up with the Joneses” – keeping up with others’ ability to pay for gifts.
- Reciprocation. If someone gives you a gift, you may feel the desire or need to give them a gift back.
Where else is gift giving important?
The analysis we attempted above seems to apply only to the setting of giving presents.
Yet there are other areas where this kind of “gift giving” analysis matters.
Here are two examples:
1) Donations to charity
- The question of why people give donations to charity is critical. For instance, do people give money to charity for altruistic (selfless) reasons, or for their own gain?
- Another possible reason for charitable donations is the “warm glow” effect. People may give gifts to please others, but only for the selfish satisfaction derived when others are made happy. A kind of “impure altruism”.
- Super-wealthy donors may also donate for political reasons. This can signal the good character of the donor to attract voters.
- This is important for charities – to increase donations, there may be different methods to target different types of donors.
2) Gift exchange in labour markets.
- Suppose your boss gives you a raise as a “gift”. Does that mean you reciprocate the gift by working harder?
- That’s the idea of the gift-exchange model.
- In a simple rational model, if someone gives you more money for nothing, why would you work harder?
- But in practice, people may work harder having received a gift.
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