Wednesday, October 05, 2005

Economics of Gift-Giving

One puzzle that seems to contradict the economic way of thinking is the fact that people give gifts at holidays or on birthdays instead of money. One would expect that people would always rather receive money for two reasons:

1.) Almost all gifts are not exactly what the person wanted, and the receiver could buy something they like better for the same amount of money.
2.) Even if the "perfect" gift was given, the receiver could still have bought that same gift if just given the money.

Therefore, in most cases, money gives the receiver more utility, and at worst, it gives the same utility as a gift.

Question to think about:
Why do people give gifts instead of the equivalent amount of money?

Post a comment through the link below to weigh in on this question.

14 comments:

Brian Zabell said...

Off the top of my head there's two reasons that products are the norm for gift-giving instead of money. One is that even though a gift in itself does not have as much value as its dollar cost, the actual giving of the gift shows respect and empathy for the reciever. If someone receives a gift that he really wanted, he also receives the benefit of knowing that someone else knows his interests and he can appreciate that.

That benefit of appreciation is exactly why gifts of money are not typically very welcome. By giving money as a gift, the giftgiver is saying, "I wanted to give you something but I don't know anything about you so here's some money instead."

The other reason why people don't give monetary gifts is, on a larger scale, the economy would be hurt. Imagine if on Christmas everybody just gave each either $50. The outcome would basically be that nobody really benefits (because the amount of money someone gives is the amount they'd receive back).

Aside from the fact that no one would benefit individually, businesses would lose money. Many businesses depend on the holidays as an incentive for people to buy their products. People don't buy jewelry just because they feel like it; they buy jewelry because they want they want to give it to someone else to make the recipient feel special. If people just give monetary gifts instead, businesses like the jewelry business (among many other businesses) would collapse.

This is why the holidays are nowadays so commercialized. Sure it's annoying that some people don't even really know why they're celebrating (Halloween is a good example), yet without the commercialism, some businesses would fail. In light of Halloween, how much money would candy companies lose if Halloween was actually about Samhain instead of candy?

Anonymous said...

First of all money is no fun to open. It is not a very exciting gift. Second gifts show that people put time and thought into what to get. Giving money does not require any thought about what the person would want. Giving gifts show that you thought anout what would make the person happy. Money is what you give to distant relatives. For close friends a gift means more than the money does.
Erin Clay

Gregory Bylos said...

I believe that the reason people give gifts instead of money is because a gift isn't given value based only on money. The reason this explanation contributes to the giving of gifts as opposed to money is that if people were to give money instead of gifts, it would become a competition on who gave the most money. A person who gives you less money than someone else would be seen as not caring as much as the first person, when in reality that might not be the case at all. Gifts allow a person to be judged on their selection of gift, not how much they spent on it. Obviously, more wealthy people could give larger gifts of money, but that doesn't mean that they care any more than those with less money.

I would have to disagree with Brian when he talks about the economy hurting. Sure, certain business' that cater to holidays would suffer; however, as a whole, the exchange of money is good for the economy. Also, although a good point, it doesn't relate to WHY people give gifts, it is simply an effect of that.

Brian Zabell said...

Well of course the exchance of money is good for the economy but not when Jack gives Jill $50 and Jill gives Jack $50. Now if Jack gives Jill a $50 cellphone and Jill gives Jack a $50 golf club, then the economy's going somewhere, right?

Anonymous said...

Another reason for gift-giving could be if you take into account time as a cost in addition to money. If you give a check, the recipient has to go on his own time to buy whatever it is that he wanted, costing him the opportunity cost associated with that time. But when you buy him a gift, it is valued not only at the actual dollar cost of the gift but also the opportunity cost of your time that went into its selection. Therefore, an actual gift costs more to the giver, increasing its value.

Jessica Wetstone

Anonymous said...

I agree with what some of the people here have already said. The value of a gift is meant to exceed simply the equivalent monetary value of the gift because of the thought that picking out a gift requires. Giving money is more profitable to the reciever, but that is not what gift-giving is about.
Giving a gift shows that one person cares enough about the other to take their time and choose a gift. It is far more personal than an envelope of money, and at times, even if the gift is not exactly what the person wanted, "it's the thought that counts."
So, in response to the original question, people give gifts because of the emotional connection associated with it. The monetary value of it, in a perfect world, would be irrelevant, and the emotion shown through giving a gift would be sufficienct.
-Andrew Gelly

Michael Arjona said...

You guys have some great ideas so far. To comment on one point of debate, giving gifts as opposed to money probably has a minimal effect on the economy as a whole. When people give money as a gift, that money is then spent by the person receiving, which is basically the same effect as someone buying a gift and giving it to someone.

Anonymous said...

Often when people give gifts of money, the receiver never actually goes out and buys themself a fun present. It either goes into savings or just dwindles away (at least thats what happens with me). When a person gets a gift they can't just spend the money on non fun items.

I agree with Brian that it shows alot of respect to actually buy someone a gift. Its so much more personal and exciting. Just handing someone money shows that you didnt know them well enough to find anything for them or you didnt want to put the effort into finding the right thing.

...and surprises are so much more exciting
-kelly gaetano

Anonymous said...

I know that there's a lot of comments on this one, but i just have one thing to add. A lot of times when you buy a non-monetary present for someone, you normally ask what they want (I like them to tell me 3 or 4 things so that it can be somewhat of a surprise). The recipient of the gift can request something fun, or something they need. Therefore, you're actually giving them what they would probably buy for themselves, so you're not minimizing their utility, but you're also not taking away the surprise or thought of a gift. You get the best of both worlds.
-Emily Freebairn

Sam Ulrich said...

I think that the economy would definitely be hurt if nobody gave gifts to anybody else for christmas. The day after Thanksgiving, known to many retail stores as Black Friday, brings most companies out of the red zone or debt and into the black or actual profit in that fiscal year. The best deals are always that day as well as the largest crowds so apparently the retailers have hit on something. If everybody just received money on Christmas then there would be no rush to a store but only a rush to ATM's and banks which would probably cause a panic which could turn the economy upside down but that would be very rare still.

Michael Arjona said...

Sam,
Your point on the fact that there would be no rush to purchase items is true, but that would merely change the timing of the purchases, not the fact that they would happen in the first place. The only way that giving money instead of gifts would have an impact on the economy (assuming the value of the money & gifts are the same) is if a good deal of that money went into savings. If most of the money is spent (which is likely since the savings rate in the United States is fairly low), then it may not be spent in December during our current Christmas shopping season, but instead business would be booming in January for retail stores as everyone went out and spent their Christmas money. So your point mainly changes the timing of the effect on the economy, not the magnitude of it.

Anonymous said...

The main reason people like birthdays in the first place is because of the emotional feeling they experience when someone takes the time to give them a gift. By going out to the store and purchasing a gift, a person is showing that he really does care about the recipient and is willing to take the time to get the best gift possible. Anyone could take $10 out of their wallet and just hand it over to somebody, but that would involve virtually no thought or care at all about the recipient and what he or she wants. The monetary value of something should be irrelevant in determining the value of a gift. Even if it's not the greatest gift ever, at least the person took the time to do something thoughtful for somebody else.
-Ravi Bhatia

Anonymous said...

There are a few reasons that i can think of that explain why people give gifts rather than the equivalant amount in dollars. The main reason is one that we have heard countless times, "its the thought that counts." Anyone can just reach into their wallet and pull out a couple bills, but buying a gift that someone will love takes thought and time. It is this that shows that someone truely cares.
I can think of only a few other less persuasive arguments for the question. One is that giving gifts (most notoriously on Christmas) is a tradition. Each wiseman gave a gift not money. And the other reason is that for people that are not very well off. They might spend money on something they need instead of something that is enjoyable like a gift should be.
-David Hale

Sarah T. Crabb said...

Economists have elaborated the economics of gift-giving into the notion of a gift economy. By extension the term gift can refer to anything that makes the other happier or less sad, especially as a favour, including forgiveness and kindness. Gifts are also first and foremost presented on occasions - birthdays and Christmas being the main examples.

Sarah Khan
Gifts To Pakistan