This post was co-authored with a recent AMU Economics Graduate, Michael Maynard (Linkedin here). It is based on his senior thesis entitled “The Highest Virtue: Re-examining gift Giving and Deadweight Loss”
When my older sister was in middle school, she received a book of baby animal stories. She loved that book and read it every day. A couple of years later my mother accidentally donated it, and my sister was heartbroken. We went to the thrift store repeatedly that week hoping to encounter it before it sold, but we never found it. Years later, our father scoured the internet trying to find the lost book – to no avail.
Years after that, I stumbled onto the exact same copy of the book in the for-sale corner of a nearby library. For a single dollar and negligible effort, I purchased the book that had long frustrated my family’s searching. Shortly before the birth of her first child, I gave the book to my sister for Christmas. It was one of the best Christmas gifts she had ever received.
Economic theory typically assumes that individuals have perfect information. Therefore, they are best suited to purchase their own gifts. That’s what motivates the not-so-romantic economist prescription to give a gift card or cash for birthdays, Christmas, graduations, etc. The theory states that, if we do not intimately know the receiver’s preferences, then we have incomplete information and it’s better to give a money-gift rather than to give a gift from which the receiver would enjoy less additional utility.
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