Gift Giving

1. Gift Giving

2. 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?

3. Summary of gift survey. • If you are an aunt, don’t give socks! • Beware of taking a girlfriend on holiday. • Cash from parents/grandparents was appreciated. • A bit surprised that a few that a bad DVD cost them £5, but they wanted £10 for it. • Some thought that the gifts they gave increased value. • Others thought they would decrease value but the gave them anyway. Why? • Some listed a bad gift as one that had little value or showed little thought even though the yield was okay. Why? • Any suggests for improvement of the survey (such as understanding: email me).

4. 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 recipient’s 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."

5. 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 α chance of the good having value v (>p) to the receiver(otherwise it is worth 0).

6. Two ways of getting the good • Shopping: the receiver travels to the store and buys the good, the social benefit is α (v-p)-c • Gift Giving: the giver gives the good to the receiver, the social benefit is α v-p • When is gift giving better than shopping? α v-p> α (v-p)-c Or c>(1- α )p • Thus, we have gift giving if c>(1- α )p and α v>p Gift giving is better than shopping Giving is not waste of money

7. Interpretation of requirements Gifts when c>(1- α )p and α v>p • Grandmother effect: when α is low, give cash since α v<p. • When α is high, gifts are better option than buying it oneself: best friends. • When c is high, gifts are better. • v doesn’t affect which method is superior. • Examples: what is the social value of gift giving, α v-p, and shopping, α (v-p)-c, when (c,v,p,α)=(1,2,1,.6), (1,3,1,.6),(1,6,2,.3),(1,8,2,.3) gg>0>shop, gg>shop>0, shop>0>gg, shop>gg>0

8. Why is gift giving still made? • If someone has better information, lower search costs or a location advantage, why do they need to give gifts? • Can’t they just charge money?

9. Why not trade instead of give? • Can’t 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 α). • 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,α)=(1,2,1,.6). • If the giver spends 1, and sales it to the buyer for 1.9 (<v=2), 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? • This lack of trade is called the hold-up problem.

10. Why not trade (part 2)? • 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 α ). • The giver may at other times see other products with lower α . • 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.)

11. Experiment game • We ran an experiment on what is called the Beer-Quiche Game (Cho & Kreps, 1987). • Proposer has 2/3 chance of being strong. • He can eat Beer or Quiche. • Strong types like Beer. Weak types like Quiche. • Responder can fight or flee. Responders don’t want to fight a strong type.

12. Signalling in the Lab:Treatment 1 • For a strong proposer,(Beer, flee)>(Beer, fight)>(Quiche, flee)>(Quiche, fight). • For a weak proposer,(Quiche, flee)>(Quiche, fight)>(Beer, flee)>(Beer, fight). • Strong chooses Beer and Weak chooses Quiche

13. Signalling in the Lab:Treatment 1 • 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.

14. Signalling in the Lab:Treatment 1 • So the equilibrium is • For strong, (Beer, Flee) • For weak, (Quiche, Fight) • This is called a separating equilibrium. • Any incentive to deviate?

15. Signalling in the Lab:Treatment 1 32 13 What did you do? In the last 5 rounds, there were 32 Strong and 13 Weak proposers

16. Treatment 2. • Can we have a separating equilibrium here?. • If the proposer is weak, he can choose Beer and get $1.00 instead of $0.60.

17. Treatment 2. • 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.

18. Treatment 2. 4 30 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?

19. Treatment 2. 23 14 3 • At Texas A&M, the aggregate numbers were shown. • In the last 5 periods, 23 proposers were strong and 17 weak.

20. 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).

21. 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.

22. Types of equilibria • Separating. • Strong signal • Weak don’t signal. • Pooling. • Strong and weak both send the signal. • (or Strong and weak both don’t send the signal.)

23. Types of equilibria • Player A is the proposer and B the responder. • The types of player A are s and w. • Let us normalize the value to A when B fights to 0. • The values to A when B flees are Vs and Vw. • The cost to signalling (drinking beer) are Cs and Cw. • We get a separating equilibria if Vs-Cs>0 and Vw-Cw<0. • We get a pooling equilibria if Vs-Cs<0 and Vw-Cw<0 (no one signals). • We may also get a pooling equilibria if Vs-Cs>0 and Vw-Cw>0 and there are enough s types. • For this to happen, there must be enough s types such that the expected payoff of B is higher fleeing than fighting.

24. Treatment 2: Other pooling?. • How about both proposers eat quiche and the responder flees? Is this an equilibrium? • If responders think anyone who drinks Beer must be weak. • Cho-Kreps introduce an “intuitive criteria” that says this does not make sense. • Any proposer drinking Beer must be strong, because the weak type can only lose from doing so.

25. How does this relate to gift giving? • Gift giving can be wasteful. (Why not give $$$?) • 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 tribe’s most valuable possession.

26. 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 haven’t 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.

27. Valentine’s 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 didn’t buy the card, your partner would assume that you are not serious and break up with you.

28. 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 doesn’t mean so much, you wouldn’t 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.

29. 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.

30. Homework • 2 Questions are due on Friday, Oct 24th. • Links the them and how to submit them are from the webpage.