TCS Daily

The Economics of Gift Giving

By James D. Miller - December 23, 2004 12:00 AM

Americans will spend billions on gifts this Christmas. Inquiring economists want to know why.

Economists believe that people seek to maximize their own pleasure, but this self-interested assumption doesn't present an obstacle to our understanding gift giving. Most humans seem to have a genetic taste for altruism and so receive pleasure from giving to those they care about.

But why do people predominately give things rather than money during Christmas? If you wanted to give $1,000 to, say, the American Cancer Society you would never go out and buy $1,000 worth of stuff that you thought they could use and then donate the stuff rather than the money.

Yet on Christmas we usually give non-monetary gifts. Most people have a better understanding of their own needs than you do and so would presumably rather have, for example, $50 in cash than a $50 gift. So why do rational individuals give non-monetary presents to their friends and family?

Some economists believe that when you give a gift that someone wants you signal your understanding and empathy for your recipient.1 Most people get pleasure from knowing that others care about us, and this is one of the reasons we like to receive gifts. But when someone buys us something we like, we know not only that they are willing to give up resources for us, but also that they have taken enough time to learn about us and understand our needs.

Consequently, to make someone really happy you should spend a lot of money on an unusual gift that she will love but that few other people would enjoy.

There appears to be a negative undertone to giving money as a gift to adults for it's often taken to mean that the gift giver doesn't greatly care about his recipient. Assume that, for whatever reason, a long time ago people inferred that those who give money rather than things didn't care very much about their gift's recipient. If everyone believed this then they would take the time to buy non-monetary gifts for all those they cared about. Consequently our non-monetary gift-giving equilibrium is probably self-perpetuating.

Some economists believe that a stigma associated with buying certain luxury items for oneself explains some non-monetary gifting behavior.2 By giving luxury items people don't feel comfortable buying for themselves donors can allow their recipients to have the luxury without paying the social stigma cost.

Other economists think that people might not give cash gifts precisely because cash is so valuable.3 You don't want people to be your friend just to get your money, yet you want to show them that you care so you give less valuable non-monetary gifts.

Some people might give things rather than money because they enjoy shopping. Many Americans like to shop but have run out of relatively inexpensive goods to buy for themselves so they use Christmas as an excuse to shop for others.

Of course, if we all gave each other money on Christmas much of our gift giving would cancel out. Perhaps the only way we can experience the joys of giving and receiving Christmas gifts is if people don't give each other cash for the holidays.

1See Prendergast and Stole, The Non-monetary Nature of Gifts, European Economic Review (2001).

2See Fremling and Posner, Market Signaling of Personal Characteristics, working paper (2000).

3See Carmichael and MacLeod, Gift Giving and the Evolution of Cooperation, International Economic Review (1997).

James D. Miller writes The Game Theorist column for TCS and is the author of Game Theory at Work.


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