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 minimum you would have to spend to
buy something that would give you the same
non-sentimental enjoyment?
• On what?
• Why do you value or not value this gift?
Waldfogel 1993 asked a similar
question.
“… amount of cash such that you are indifferent
between the gift and the cash, not counting the
sentimental value of the gift."
Average yield of non-cash gifts.
Price range
% yield
Standard
error
N
$0-$25
85.8
5.6
102
$26-$50
74.4
3.4
82
$51-$100
89.8
4.2
47
Over $100
88.5
4.2
47
Overall
83.9
2.8
246
Todd’s last gift
• From the university, for our success.
• I have to choose from
– A mixed case of Hardy’s Riddles wine.
– Two bottles of Champagne.
– The special “Fairtrade” Chocolate
Hamper.
– “The Nature of Britian” by Alan
Titchmarch
– “Saving Planet Earth” by Tony Juniper
– Donation of £25 to St. Petrock’s charity
for the homeless or the University
Foundation Fund.
Waldfogel concluded that
• Dead weight loss between $4 billion and
$13 billion for xmas gifts.
Deadweight loss.
For same price could have had.
Loss
After gift
Initial endowment
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 gave
Price paid
Yield
% cash
Parent
$135.60
87%
10%
Grandparent
$75.90
63%
42%
Aunt/Uncle
$64.60
64%
14%
Sibling
$28.30
86%
6%
Friend
$25.30
99%
6%
Significant Other $25.40
92%
0%
Why is there gift giving?
• Take a minute to discuss with you
neighbor as to why people give gifts.
Reasons:
1. Pleasant to receive /give
2. Tradition, locked in. Obligation.
3. Gift exchange.
4. Repayment for loss/pain caused.
5. Reward.
6. Can pretend to give more than you actually do.
7. Self image to giver.
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
The gift showed a lot of thought
Wanted but felt shouldn’t buy it for self
Wanted but never remembered to buy
Wouldn’t have wanted to shop for it.
Wouldn’t have bought but may grow to
appreciate it.
Giver has better taste than oneself.
Item is not readily available
You didn’t know this item was available
# /155
50
50
22
20
19
18
13
6
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 (2007) "Here's
something you never asked for, didn't know existed,
and can't easily obtain: A search model of gift giving".
Motivation
• claim that gift giving is welfare reducing rests on 2 (unrealistic)
assumptions:
1) gift recipients possess full information as to whereabouts of goods
they desire
2) gift recipients are able to obtain such goods costlessly
• Kaplan and Ruffle (KR) break with this literature by relaxing these
assumptions:
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
• If the receiver travels to the store, the
social benefit is α (v-p)-c
• If the giver buys the good for the receiver,
the social benefit is α v-p
• When is gift buying 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
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
and shopping when
(c,v,p,α)=(1,2,1,.6), (1,3,1,.6),(1,6,2,.3),(1,8,2,.3)
gg>0>buy, gg>buy>0, buy>0>gg, buy>gg>0
Why not trade?
• 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 not be willing to purchase
the good for a price of v. That would leave him
indifferent.
• Go back to (c,v,p,α)=(1,2,1,.6).
• If the giver spends 1, at a sales price of 2, he
would on average receive 1.2 for a profit of .2.
• How much must he get to make a profit?
Why not trade?
• We can interpret our model as an information acquisition
model.
• 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
Signalling in the Lab:
Treatment 1
Payoffs: Proposer, Responder
Flee
Fight
Beer (Strong)
$2.00, $1.25
$1.20, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$2.00, $0.75
$1.20, $1.25
• For a strong proposer, (Beer, flee)>(Beer, fight)>(Quiche,
flee)>(Quiche, fight).
• For a weak proposer, (Quiche, flee)>(Quiche, fight)>(Beer, flee)>(Beer,
fight).
•Strong chooses Beer and Weak chooses Quiche
Signalling in the Lab:
Treatment 1
Payoffs: Proposer, Responder
Flee
Fight
Beer (Strong)
$2.00, $1.25
$1.20, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$2.00, $0.75
$1.20, $1.25
• Responder now knows that Beer is the choice of the strong type and
Quiche is the choice of the weak type.
• For Beer he flees, for Quiche he fights.
Signalling in the Lab:
Treatment 1
Payoffs: Proposer, Responder
Flee
Fight
Beer (Strong)
$2.00, $1.25
$1.20, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$2.00, $0.75
$1.20, $1.25
• So the equilibrium is
• For strong, (Beer, Flee)
• For weak, (Quiche, Fight)
• This is called a separating equilibrium.
• Any incentive to deviate?
Signalling in the Lab:
Treatment 1
Payoffs: Proposer, Responder
Flee
32
Fight
Beer (Strong)
$2.00, $1.25
$1.20, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$2.00, $0.75
$1.20, $1.25
What did you do?
In the last 5 rounds, there were 32 Strong and 13 Weak proposers
13
Treatment 2.
Payoffs: Proposer, Responder
Flee
Fight
Beer (Strong)
$1.40, $1.25
$0.60, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$1.40, $0.75
$0.60, $1.25
• Can we have a separating equilibrium here?.
• If the proposer is weak, he can choose Beer and get $1.00 instead
of $0.60.
Treatment 2.
Payoffs: Proposer, Responder
Flee
Fight
Beer (Strong)
$1.40, $1.25
$0.60, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$1.40, $0.75
$0.60, $1.25
• Can we have a separating equilibrium here?.
• If the proposer is weak, he can choose Beer and get $1.00 instead
of $0.60.
Treatment 2.
Payoffs: Proposer, Responder
Flee
Fight
Beer (Strong)
$1.40, $1.25
$0.60, $0.75
Quiche (Strong)
$1.00, $1.25
$0.20, $0.75
Beer (Weak)
$1.00, $0.75
$0.20, $1.25
Quiche (Weak)
$1.40, $0.75
$0.60, $1.25
•Can choosing Beer independent of being strong or weak be an
equilibrium?
•Yes! The responder knows there is a 2/3 chance of being strong,
thus flees.
•This is called a pooling equilibrium.
Treatment 2.
Payoffs: Proposer, Responder
Flee
Fight
4
$0.60, $0.75
30
Beer (Strong)
$1.40, $1.25
Quiche (Strong)
$1.00, $1.25
Beer (Weak)
$1.00, $0.75
Quiche (Weak)
$1.40, $0.75
3
$0.20, $0.75
$0.20, $1.25
$0.60, $1.25
8
•Did we have a pooling equilibrium?
•In the last 5 rounds there were 34 strong proposers and 11 weak
proposers.
•Do you think there is somewhat to help the pooling equilibrium to
form?
Treatment 2.
Payoffs: Proposer, Responder
Flee
Fight
23
Beer (Strong)
$1.40, $1.25
$0.60, $0.75
Quiche (Strong)
$1.00, $1.25
Beer (Weak)
$1.00, $0.75
$0.20, $0.75
14
$0.20, $1.25
Quiche (Weak)
$1.40, $0.75
$0.60, $1.25
•At Texas A&M, the aggregate numbers were shown.
•In the last 5 periods, 23 proposers were strong and 17 weak.
3
Signalling game
• Spence got the Nobel prize in 2001 for this.
• There are two players: A and B. Player A is
either strong or weak.
– Player B will chose one action (flee) if he knows
player A is strong
– and another action (fight) if he knows player A is
weak.
• Player A can send a costly signal to Player B (in
this case it was to drink beer).
Signal
• For signalling to have meaning,
– we must have either cost of the signal higher
for the weak type.
– Or the gain from the action higher for the
strong type.
Types of equilibria
• Separating.
– Strong signal
– Weak don’t signal.
• Pooling.
– Strong and weak both send the signal.
Types of equilibria
•
•
•
•
The types of player A are s and w.
Let us normalize the value to fleeing as 0.
The values are Vs and Vw.
The cost to signalling (drinking beer) are Cs and
Cw.
• We get a separating equilibria if Vs-Cs>0 and
Vw-Cw<0.
• We get a pooling equilibria if Vs-Cs<0 and VwCw<0 (no one signals).
• We may also get a pooling equilibria if Vs-Cs>0
and Vw-Cw>0 and there are enough s types.
How does this relate to gift giving?
• Basically, you get someone a gift to signal
your intent.
• American Indian tribes, a ceremony to
initiate relations with another tribe included
the burning of the tribe’s most valuable
possession,
Courtship gifts.
• Dating Advice.
• Advice 1: never take such advice from an
economist.
• Advice 2.:
– Say that there is someone that is a perfect match for
you. You know this, they just haven’t figured it out yet.
– Offer to take them to a really expensive place.
– It would only make sense for you to do this, if you
knew that you would get a relationship out of it.
– That person should then agree to go.
Valentine’s Day
• Who bought a card, chocolate, etc?
• We are forced to spend in order to signal that we “really”
care.
• Say that you are either serious or not serious about your
relationship.
• If your partner knew you were not serious, he or she
would break up with you.
• A card is pretty inexpensive, so both types buy it to keep
the relationship going.
• Your partner keeps the relationship since there is a real
chance you are serious.
• No real information is gained, but if you didn’t buy the
card, your partner would assume that you are not
serious and break up with you.
Higher value and/or Lower Cost
Higher value
• You buy someone a gift to signal that you care.
• Sending a costly signal means that they mean a
lot to you.
• For someone that doesn’t mean so much, you
wouldn’t buy them such a gift.
Lower cost
• The person knows you well.
• Shopping for you costs them less.
• They signal that they know you well.
Other types of signalling in the
world
•
•
•
•
•
•
University Education.
Showing up to class.
Praying. Mobile phone for Orthodox Jews
Poker: Raising stakes (partial).
Peacock tails.
Limit pricing.