Why Do We Give Gifts?
Economists find the widespread practice of giving gifts puzzling for a number of reasons. The most obvious one is that we generally expect individuals to know more about their own preferences than other people do. So it would seem that a gift in money, which I can use to buy whatever I most value, would almost always make more sense than a gift purchased for me. While there are exceptions, cases where the giver happens to have special knowledge that the recipient does not, it is hard to see how they can explain what we actually observe. And besides, the knowledgeable gift giver could always send me a check accompanied by a note recommending the book he would have bought for me, leaving it up to me to decide whether to acccept the recommendation.
At first glance, the idea that giving a gift shows you were willing to go to the trouble to find one seems even less persuasive--why not simply send a check equal to the value of the gift you would have bought plus the value of the time you would have spent finding it? But there are two variants on this argument that might work.
The first, which I came up with long ago, is based on Becker's analysis of the economics of altruism. If I am an altruist with regard to you it is in my interest to be well informed about your preferences in order that I can recognize situations where I have an opportunity to confer a large benefit on you at a small cost to me. It is also, via Becker's Rotten Kid Theorem, in my interest for you to know that I am an altruist with regard to you, since that makes it in your interest to act altruistically towards me--loosely speaking, because the richer I am the more I will be able to help you. For details see the relevant chapter of my webbed Price Theory text.
If I am well informed about your preferences, it is relatively inexpensive for me to find a gift you will like. Hence giving a gift you will like meets the requirement for a signal of altruism--it is cheaper to send the signal if it is true than if it is false.
This is, I think, a logically possible explanation of gift giving, but I don't find it a very convincing one. I now have a second candidate.
Suppose we accept the plausible idea that I can be modeled as two individuals in one body. The first is a short run pleasure maximizer--the me that almost always wants an ice cream cone or another potato chip. The second is a long term utility maximizer--the me that promises not to have ice cream for desert until he has lost five pounds and tries to force the first me to keep the promise.
Most of us do not face an immediate budget constraint. Spending an extra few dollars on a gift doesn't mean that I can't afford an ice cream cone today, it means I will have a few dollars fewer when I retire. The long run me cares about that, but the short run me doesn't. Spending an extra hour shopping, on the other hand, is a cost that occurs now and so counts for both versions of me.
We now have a second explanation of gift giving. By giving you a gift instead of cash, I demonstrate that the short run me as well as the long run me cares about you.
When proposing an economic theory of behavior, it is worth thinking about whether it has any testable implications. This one does. A critical assumption in the argument is that the gift giver does not face a short term budget constraint--that spending money on a gift doesn't mean going hungry to bed or having to spend an extra couple of hours shoveling snow. It follows that the giving of money instead of purchased goods ought to be more common among people who do face such a budget constraint.
Since I am by nature lazy, hence a theorist, I will leave to someone else the project of actually finding data that could be used to test the explanation I have just offered.