The Economics of Good Gift Giving

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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Using Economics to Save Presents from the Economists

Economists like to hate on gift giving. Many of them consider purchasing a gift for another person as a futile attempt at imagining the preferences of another person. Given that you can’t perfectly know another person’s preferences, your gift selection will be sub-optimal. The argument goes that your friend or spouse or whomever would have been better off if you had given them money instead. Then they could have made the gift decision fully equipped with the information that is necessary to make them happiest.

There are some obvious things that are glossed over. Purchasing a good gift – or even writing a card – carries a big load of signaling value. People like to be liked and receiving a good gift signals that the giver cared enough to research appropriate gifts. Also, receiving money as a gift puts the onus of research and transaction costs on the receiver. If the recipient’s value of time is adequately high, then cash payments are even more resource destructive than giving a non-pecuniary gift. Especially if there is an expectation that the giver will later enquire about how the funds were used. At that point, the giver is saddling the recipient with all of the anxieties and costs of choosing a gift that makes another person happy.

But I want to talk about a non-obvious benefit of gift giving.

First, I want to talk about student loans (I promise, it’s relevant). Plenty of people argue that college students don’t understand debt and that they therefore don’t understand the future cost that they will bear by borrowing. When the lender is the department of education, there is no defaulting with the hope of bankruptcy. The debt will get repaid…. So far anyway.

If it’s true that students don’t understand debt, then we can appropriately construe future student loan payments as lump-sum costs. Of course there is deferment and forbearance – but put those to the side. The bottom line is that, almost regardless of a debtor’s activities, they must repay their debt. It doesn’t matter how the debtor earns or consumes, the debt must be paid. This fits the description of a lump-sum cost. Usually, things like lump-sum taxes are hypothetical and unpopular among the laity. But, if we accept that the decision-making-student has incomplete information in regard to the debt’s future payment implications, then the debt payments are exogenous and unavoidable from the future debtor’s perspective.

This is a good thing for the productivity of our economy. Because people are making tradeoffs between the two goods of leisure and consumption, a lump-sum tax causes individuals to work more than they would have worked otherwise. Lump-sum taxes don’t reduce the marginal benefit of working. Essentially, a debtor’s first several hours of work pay-off his debt first and then he gets to work for his own consumption.

Importantly, this ignores any human capital effects of the education. It doesn’t matter whether education actually makes people more productive. The seemingly exogenous debt payments cause debtors to work more and produce more for others. The RGDP per capita of our economy rises and we know that most of the benefits of work do not accrue to producers. Student debt, with the accompanying assumptions laid out above, therefore increases our incomes because it acts as a lump-sum tax.

Now it’s time to save presents from the economists.

As families get older and siblings drift apart, gift-giving begins to become less exciting. I’m tempted to say there is a natural process in which the first couple of adult-sibling Christmases include decent gifts. Then, the gifts become not-so-great as siblings become less familiar with each others’ preferences. Knowing this and still wanting to give a suitable gift, siblings may turn to gift cards. The less that a sibling knows the preferences of another, the more general the gift card.

If you’ve grown more distant from your brothers/sisters and you know that you’ll receive a gift, then it’ll probably be an Amazon, or Walmart, or some other gift card that permits spending on a broad variety of gifts. There comes a point when you’re spending $X on gift cards each year where $X = $x(n). That is, you’re spending some amount on each sibling for a total of $X each year. And for the sake of social cohesion and norms, all of your siblings are doing the same thing and spending the same amounts.

Importantly, you don’t control the social norms, nor your number of siblings. It might seem like you’re all just trading dollar bills at a unitary exchange rate, leaving no-one better or worse-off. But, trading cash is gauche. So, distant siblings trade broadly attractive gift cards in order to achieve that gift-like aura.

Social norms also say that gift giving is not a trade. If you don’t receive a gift, then you’re supposed to be ‘ok’ with that. So, each year you will spend $X on gift cards for your distant siblings and there is some probability that you get nothing in return. If you can’t control the number of siblings that you have and you can’t control whether you receive a gift card in return, then giving cash or cash-like gift cards to your siblings each year is a lot like a lump-sum cost. Socially – or maybe morally – you shouldn’t just ignore your siblings and it is incumbent upon you to give a gift.

Having to give away a lump-sum of money or money-like things no matter what else you do is a lump-sum cost. If people bear lump-sum costs, then they will work a little bit more and produce a little bit more for society. If gifts suboptimal but at least considered a ‘good’, then we’re better off: we work more to make others somewhat better off with resources that wouldn’t exist if we hadn’t chosen to give to others.

There are some caveats, of course. Economists are often not so popular at parties for a variety of reasons. One reason is that they flout social conventions. An economist might scoff at the social constraints as unbinding. Others would disagree. Another point of contention may be that an individual can choose to work no more, but to invest less instead. But this really just pushes the problem off until the individual has less income in the future and works more to compensate for it at a later time. A 3rd caveat is that we can choose the amount that we spend in others. But that just implies that at least part of the gift giving ritual isn’t a lump-sum cost. It does not imply that none of gifting giving is a lump sum cost.

Regardless, the social convention of giving gifts can provide for a Schelling point that makes us a more productive as a society. We spend on others, to a great degree beyond our individual control, in order to avoid severe social stigma. And, if we can’t control all of who counts as a worthy recipient of gifts, then we have a lump-sum cost to some degree. Giving gifts makes sense as a productive convention because it makes us a richer as part of a general equilibrium – if not a partial equilibrium. Merry Christmas.