Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Sunday, December 26, 2004

More on Gifts and Economics

Now that most Christmas gift-giving is over, how many of you received a gift which reduced your utility? [e.g., ... uh....., well, I'd better not post about it, but it does not take much imagination to concoct several examples].

How many of you received gifts which you would never have acquired on your own, even at no charge, but which you appreciate because of the (dare I say) love you have for the person who gave it to you?

How many of you received gifts which you would never have bought had you received cash equal to their market value but which you are nevertheless delighted to have, either because of the person who gave it to you or because of the luxurious feeling that you would never indulge if spending your own money [see below]? (nearly all the gifts I receive are in these two categories).

Many economics bloggers have written recently on the economics of gifting, including The Econoclast, Tyler Cowen, Ben Muse, and King Banaian.

Tyler cites this article written last year, a reference to Waldfogel, asserting that on average people would pay 16% less than the market value for the gifts they receive. In my view that is not even close! If I went into the store and saw most of the gifts I receive on sale for 25% off their regular prices, I still would not purchase many, if any, of them. In that sense, 16% as an estimate of the dead-weight loss due to Christmas gift-giving is way too low.

At the same time, if people offered me the regular prices for the gifts I receive, I would decline their offer! There are two reasons: First, as is common, I experience a type of inertia in that I need to be compensated more to make a change, no matter which direction the change is headed (This effect is well-noted here by Kahneman, Knetsch, and Thaler). I know this attitude flies in the face of what many think of as rational maximizing and opportunity costs. So be it.

Second, even though I, personally, would not pay regular price for some of the gifts, I would not dream of parting with them just because of my attachment to the giver - - - that attachment adds considerably to my utility.

In this paper by Prendergast and Stole, it is argued that we could hypothetically show people how much we care by offering them a choice between the gift, itself, or the cash we would spend on the gift. E.g., "I like you enough and know you enough to want to give you this gift, but you can have the cash if you'd rather."

But we do not do this, according to P&S , as some sort of pre-commitment strategy: we give the gift instead of offering the choice to prove to them we think we know them well enough to buy that gift for them. It's a fun idea, but I don't know anyone who thinks that way. I figure we do not offer a choice between the gift and the cash because we do not want to put recipients on the spot and/or we do not want to be told we have made a bad choice. But the idea does lead to this:

Implication -- when a group of people get together and exchange gift certificates, it's time to call a halt to the process.

UPDATE: Look what happened in Tyler Cowen's family when they all agreed not to give Christmas presents this year! I hope he posts more to explain this!

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