Gift Giving

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Gift Giving
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Your last gift.

• What was the last gift you received (money
  counts)?
• Who gave it to you (parent, grandparent, friend)?
  
• What would you estimate the price the person paid
  to buy it?
• What is the amount of cash such that you are
  indifferent between the gift and the cash, not
  counting the sentimental value of the gift?
• Why do you value or not value this gift?

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Todds Worst Gift (received)

• Wedding Gift from his friend Marc.
• A large, heavy crystal eagle from Tiffanys.
• Was given to me in NJ when I lived in overseas.
  (High transportation costs.)
• It wasnt particularly elegant.
• Luckily, I was able to trade it in for silver
  spoons.
• Problem is that Marc still bugs me about trading
  it in.

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Waldfogel 1993 asked a similar question.
The yield of a gift is (value/price)100.
Average yield of non-cash gifts.
Price range yield Standard error N
0-25 85.8 5.6 102
26-50 74.4 3.4 82
51-100 89.8 4.2 47
Over 100 88.5 4.2 47
Overall 83.9 2.8 246
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Welfare loss

• Waldfogel concluded that Dead weight loss between
  4 billion and 13 billion for 1993 xmas gifts.
• Americans spent 137 billion on non-cash gifts to
  non-household members alone in 2006.
• This is 2.4 of total consumer expenditures,
  according to the Bureau of Labor Statistics
  Consumer Expenditure Survey.

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Deadweight loss.
For same price could have had.
Loss
After gift
Initial endowment
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Three questions

• Types of givers
• Aunts/uncles, parents, friends, grandparents,
  siblings, significant others.
• Who gave the most (or least) expensive gifts?
• Who gave the highest (or lowest) yield?
• Who was most (or least) likely to give cash?

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Who gave what.
Who gave Price paid Yield cash
Parent 135.60 87 10
Grandparent 75.90 63 42
Aunt/Uncle 64.60 64 14
Sibling 28.30 86 6
Friend 25.30 99 6
Significant Other 25.40 92 0
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Why is there gift giving?

• Take a minute to discuss with you neighbor as to
  why people give gifts.

• Reasons

• Reasons

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Why?

• Psychological reasons and economic reasons.
• Why is there a psychological value? Shouldnt
  evolution get rid of it?
• There is an economic loss to gift giving. Could
  it ever make economic sense?
• Could it ever make sense to give a gift rather
  than money?

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Reasons for valuing the gift.
Reason /155
The gift showed a lot of thought 50
Wanted but felt shouldnt buy it for self 50
Wanted but never remembered to buy 22
Wouldnt have wanted to shop for it. 20
Wouldnt have bought but may grow to appreciate it. 19
Giver has better taste than oneself. 18
Item is not readily available 13
You didnt know this item was available 6
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Some economic reasons

• Insurance weddings, hunter-gatherers.
• Intergenerational loan.
• Paternalistic. Is this economic?
• Search
• Giver has better taste than oneself.
• Item is not readily available
• You didnt know this item was available
• Wouldnt have wanted to shop for it.
• Wanted but never remembered to buy

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Todd Kaplan and Bradley Ruffle (2008) "In search
of welfare-improving gifts".

• Motivation
• claim that gift giving is welfare reducing rests
  on several assumptions
• the giver does not perfectly know the recipients
  preferences.
• gifts cannot be costlessly refunded.
• gift recipients possess full information as to
  whereabouts of goods they desire
• gift recipients are able to obtain such goods
  costlessly
• Kaplan and Ruffle (KR) break with this literature
  by relaxing assumptions 3 4
• 1) they add uncertainty about the existence
  location of goods and
• 2) search costs to resolve this uncertainty
• importance of search-cost savings in modern gift
  giving can be heard in common expressions of
  gratitude upon receipt of a gift "where did you
  find it? I've looked all over for this item."

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Simplified Model

• There is a giver and a receiver.
• The giver is at a store and has to decide whether
  or not to buy a gift for the receiver.
• The receiver would have to spend c to visit the
  store.
• The gift costs p to purchase.
• There is an a chance of the good having value v
  (gtp) to the receiver (otherwise it is worth 0).

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Two ways of getting the good

• Shopping the receiver travels to the store and
  buys the good, the social benefit is a (v-p)-c
• Gift Giving the giver gives the good to the
  receiver, the social benefit is a v-p
• When is gift giving better than shopping?
• a v-pgt a (v-p)-c
• Or cgt(1- a )p
• Thus, we have gift giving if cgt(1- a )p and a vgtp

Gift giving is better than shopping
Giving is not waste of money
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Interpretation of requirements

• Gifts when cgt(1- a )p and a vgtp
• Grandmother effect when a is low, give cash
  since a vltp.
• When a is high, gifts are better option than
  buying it oneself best friends.
• When c is high, gifts are better.
• v doesnt affect which method is superior.
• Examples what is the social value of gift
  giving, a v-p, and shopping, a (v-p)-c, when
• (c,v,p,a)(1,2,1,.6), (1,3,1,.6),(1,6,2,.3),(1,8,2
  ,.3)
• gggt0gtshop, gggtshopgt0, shopgt0gtgg, shopgtgggt0

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Why not trade instead of give?

• Cant the giver simply make a profit buying from
  the store and selling to the receiver?
• In such a case, the receiver would only buy the
  good if it is worth v (with probability a).
• The receiver would bargain to purchase the good
  for a price less than v (buying at v would leave
  him indifferent).
• Go back to (c,v,p,a)(1,2,1,.6).
• If the giver spends 1, and sales it to the buyer
  for 1.9 (ltv2), he would on average receive 1.14
  for a profit of .14.
• How much must the giver get from the receiver in
  order to make a profit?

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Why not trade?

• We can interpret our model as an information
  acquisition model.
• The giver knows more than the about the good.
• The giver knows this is something the receiver
  potential wants (with prob a ).
• The giver may at other times see other products
  with lower a .
• The cost c is what it costs for the receiver to
  learn whether it is something he wants.
• Trade would not solve this basic problem, since
  the receiver would still have to spend c and
  without doing so the giver would have incentive
  to push unwanted products. (The
  stereo/car/fashion salesman.)

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Need to go to lab
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Signalling in the LabTreatment 1
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 2.00, 1.25 1.20, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 2.00, 0.75 1.20, 1.25

• For a strong proposer, (Beer, flee)gt(Beer,
  fight)gt(Quiche, flee)gt(Quiche, fight).
• For a weak proposer, (Quiche, flee)gt(Quiche,
  fight)gt(Beer, flee)gt(Beer, fight).
• Strong chooses Beer and Weak chooses Quiche

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Signalling in the LabTreatment 1
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 2.00, 1.25 1.20, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 2.00, 0.75 1.20, 1.25

• Responder now knows that Beer is the choice of
  the strong type and Quiche is the choice of the
  weak type.
• For Beer he flees, for Quiche he fights.

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Signalling in the LabTreatment 1
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 2.00, 1.25 1.20, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 2.00, 0.75 1.20, 1.25

• So the equilibrium is
• For strong, (Beer, Flee)
• For weak, (Quiche, Fight)
• This is called a separating equilibrium.
• Any incentive to deviate?

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Signalling in the LabTreatment 1
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 2.00, 1.25 1.20, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 2.00, 0.75 1.20, 1.25
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13
What did you do? In the last 5 rounds, there were
32 Strong and 13 Weak proposers
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Treatment 2.
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 1.40, 1.25 0.60, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 1.40, 0.75 0.60, 1.25

• Can we have a separating equilibrium here?.
• If the proposer is weak, he can choose Beer and
  get 1.00 instead of 0.60.

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Treatment 2.
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 1.40, 1.25 0.60, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 1.40, 0.75 0.60, 1.25

• Can we have a separating equilibrium here?.
• If the proposer is weak, he can choose Beer and
  get 1.00 instead of 0.60.

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Treatment 2.
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 1.40, 1.25 0.60, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 1.40, 0.75 0.60, 1.25

• Can choosing Beer independent of being strong or
  weak be an equilibrium?
• Yes! The responder knows there is a 2/3 chance of
  being strong, thus flees.
• This is called a pooling equilibrium.

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Treatment 2.
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 1.40, 1.25 0.60, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 1.40, 0.75 0.60, 1.25
4
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3
8

• Did we have a pooling equilibrium?
• In the last 5 rounds there were 34 strong
  proposers and 11 weak proposers.
• Do you think there is somewhat to help the
  pooling equilibrium to form?

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Treatment 2.
Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder Payoffs Proposer, Responder
Flee Fight
Beer (Strong) 1.40, 1.25 0.60, 0.75
Quiche (Strong) 1.00, 1.25 0.20, 0.75
Beer (Weak) 1.00, 0.75 0.20, 1.25
Quiche (Weak) 1.40, 0.75 0.60, 1.25
23
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3

• At Texas AM, the aggregate numbers were shown.
• In the last 5 periods, 23 proposers were strong
  and 17 weak.

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Signalling game

• Spence got the Nobel prize in 2001 for this.
• There are two players A and B. Player A is
  either strong or weak.
• Player B will chose one action (flee) if he knows
  player A is strong
• and another action (fight) if he knows player A
  is weak.
• Player A can send a costly signal to Player B (in
  this case it was to drink beer).

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Signal

• For signalling to have meaning,
• we must have either cost of the signal higher for
  the weak type.
• Or the gain from the action higher for the strong
  type.

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Types of equilibria

• Separating.
• Strong signal
• Weak dont signal.
• Pooling.
• Strong and weak both send the signal.

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Types of equilibria

• The types of player A are s and w.
• Let us normalize the value to fleeing as 0.
• The values are Vs and Vw.
• The cost to signalling (drinking beer) are Cs and
  Cw.
• We get a separating equilibria if Vs-Csgt0 and
  Vw-Cwlt0.
• We get a pooling equilibria if Vs-Cslt0 and
  Vw-Cwlt0 (no one signals).
• We may also get a pooling equilibria if Vs-Csgt0
  and Vw-Cwgt0 and there are enough s types.

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How does this relate to gift giving?

• Basically, you get someone a gift to signal your
  intent.
• American Indian tribes, a ceremony to initiate
  relations with another tribe included the burning
  of the tribes most valuable possession,

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Courtship gifts.

• Dating Advice.
• Advice 1 never take such advice from an
  economist.
• Advice 2.
• Say that there is someone that is a perfect match
  for you. You know this, they just havent figured
  it out yet.
• Offer to take them to a really expensive place.
• It would only make sense for you to do this, if
  you knew that you would get a relationship out of
  it.
• That person should then agree to go.

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Valentines Day

• Who bought a card, chocolate, etc?
• We are forced to spend in order to signal that we
  really care.
• Say that you are either serious or not serious
  about your relationship.
• If your partner knew you were not serious, he or
  she would break up with you.
• A card is pretty inexpensive, so both types buy
  it to keep the relationship going.
• Your partner keeps the relationship since there
  is a real chance you are serious.
• No real information is gained, but if you didnt
  buy the card, your partner would assume that you
  are not serious and break up with you.

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Higher value and/or Lower Cost

• Higher value
• You buy someone a gift to signal that you care.
• Sending a costly signal means that they mean a
  lot to you.
• For someone that doesnt mean so much, you
  wouldnt buy them such a gift.
• Lower cost
• The person knows you well.
• Shopping for you costs them less.
• They signal that they know you well.

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Other types of signalling in the world

• University Education.
• Showing up to class.
• Praying. Mobile phone for Orthodox Jews
• Poker Raising stakes (partial).
• Peacock tails.
• Limit pricing.