We’ve written about gifts before.
- We’ve written posts recommending Christmas gifts (here and here and here and here).
- I wrote that gifts might be good for the macroeconomy.
- Joy Wrote about birthday presents at school parties.
- James wrote about considering supply chain status when ordering a gift.
Michael Maynard and I wrote about giving a good gift. A good gift is one in which the giver has an information advantage. Gifting an object or a service can provide a consumption bundle to the recipient that they didn’t know was even possible or that they didn’t know that they would prefer. They would have chosen the items themselves, if only they had known about them. Giving a gift card can be similar if the recipient did not know about the vendor previously. Cash is a good gift when the giver does not have an information advantage over the recipient.
In our previous post, we showed diagrammatically that ‘better off’ was indicated by the higher utility. But this spurs an important question:
Can good gifts cost the giver zero dollars?
If the utility of the recipient is what we care about, then we need not incur the cost of either a cash or in-kind transfer in order to improve their lot. If only there were a way to improve the recipient’s utility without incurring a cost to the giver!
And How! Return of the information advantage.
If the giver does genuinely have an information advantage, then he can save his hard-earned time and money by providing a very low cost gift: The gift of good advice. Now, I know what you’re thinking. That sounds cheap and uncaring. To which I say, absolutely to the former and the latter couldn’t be further from the truth. Indeed, if you are able to dispense good advice to the recipient that leverages your information advantage, then you have made their knowledge of utility-enhancing consumption bundles more complete. Their utility will rise. Not only that, a good gift receiving friend should be thrilled both with their improved utility and with your pecuniary savings.
How do you make pasta?
Step 1: Boil water on the stove.
Step 2: Wait 5-10 minutes.
Step 3: Cook pasta.
Step 4: Etc.
It’s a simple process. That’s the way I did it for 15 years, that’s the way my parents did it, and their parents before them. But now that I’m an adult parent with access to the information superhighway, I know better. You should amend your pasta making ways too. You should first boil your water in an electric kettle, then add it to the pot that’s on the stove. There are many advantages to this step:
- You’ll have boiling water in <5 minutes (saves time).
- You’ll use less electricity than an electric stove (saves money and the environment, allegedly).
- You’ll use fewer BTUs than either a gas or an electric stove (reduces heat waste and your home temperature).
Pasta is a quick meal. Saving 5 minutes is a big deal. One weak objection is that you’re introducing another item to clean. To which I say: Cleaning out the water? Poppy-cock! Or maybe your counter space is constrained. I know multiple families who keep their toaster in a cabinet and they don’t seem to be irritated by it.
What can I say, except ‘You’re Welcome’?
Would you look at that? I just made you better off. You’ll have higher utility and you’re friendly blogo-sphere economist to thank for it. You didn’t receive more stuff. You received information which enables you to better expend your budget. What’s more, my bank account it safely insulated.
Faux Paw or Faux Flaw?
While the logic above is sound, I’m a trained professional and it’s best not to try this at home. First of all, there is another context in which people try to provide complimentary information gifts: advertisements. Receiving information as a gift feels like someone is trying to encourage you to spend money. We wonder what they have to gain and how they are subject to their own incentives. So, right away, an encouraging gift of information feels sketchy.
Further, the gift of information is poor in part because my bank account is untouched. Part of what makes gifts meaningful to people is that the giver signals their care by incurring a pecuniary or temporal cost. This is why large gift cards are meaningful and information leveraging in-kind gifts can be meaningful. Purchasing a gift while leveraging an information advantage reflects the time investment that was necessary to become familiar with the recipient’s preferences. Crafted gifts are also acceptable for the same reason.
I like a good fruit basket. But, if my non-existent rich uncle sent me a fruit basket every year with an automatically written card, then I’d be somewhat nonplussed. Even though I enjoy fruit, my uncle would be signaling that he does not care enough about me to incur the cost of spending or learning specifically about me.
Part of what makes a good gift is the fact that it’s a somewhat ‘inefficient transfer’. My wife can buy her own flowers and chocolate. She goes to the store once a week and passes by the same retail space that I would need to make a special trip to visit. In fact, we’d save on gas money and time if she purchased her own gift. But, it is exactly that cost incurred by me that helps to communicate the degree to which I was thinking of her (a gift in itself).
When I was an undergraduate student, I gifted options to my dad. One year, I gave him a voucher worth $100 if he purchased a new water heater. I thought that it was a great gift. It was an incentive for him to purchase something that would make his life better (he was not great at home maintenance). The next year, I gifted another $100 voucher. What a great gift! He would be better off if he took advantage of the vouchers. Alternatively, I might never have to pay anything. Don’t do this! It was a poor gift because it signaled my reservations about incurring a cost.
The gift of information can cause somebody to have higher utility. But, ironically, it can also give them the information that you don’t care much about them (regardless of whether you do actually care about them). Information is a tricky thing. You communicate a fact that you intend, facts that you don’t intend, and you communicate the act of communicating itself.
All in all, that signal is important. If you’re at a loss, then just buy some nice wine, coffee beans, flowers, or some chocolate. Tickets to an event are also a good idea. Don’t give gauche gifts.
You can’t properly value gift-giving as a utility function… I’d argue that the major function of gift giving is improving status (within the relationship or the community), and that negative utility is actually the point.
A utility function includes status. It can be identically modeled with preferences, or even goal oriented choices.
You seem to imply that social status isn’t a good in the utility function. Also, a utility improving gift is better than a utility harming gift, all else the same. Do you mean that reducing utility of the giver is important? That’s precluded by the rational choice model. The purpose of signaling is to demonstrate how the giver cares more about the recipient more than the alternative uses of their resource budget.
Aha, you said it better than I did. I should rephrase that: You can’t model gift-giving without realizing that the value of the gift comes not from the utility to the receiver, but the cost to the borrower. $100 of useful but free advice is worth less than a $10 gift to a recipient that has no use for it, because “it’s the thought that counts”.