The Institute for Humane Studies did an interview with George Mason University economist Chris Coyne just before Valentine’s Day on the economics of gifts. Chris lays out one of the standard claims that economists have made about gifts: that to the extent the recipient values the gift less than the cost to the giver, there is deadweight loss. This is the conclusion I had reached in graduate school when studying economics got me rethinking so many things. But my friend Jeff Hummel pointed out that there really can’t be a deadweight loss in the standard sense because the gift buyer is making a voluntary decision. Jeff writes:

Non-monetary gifts cannot EX ANTE cause deadweight loss any more than buying yourself such a “gift,” unless the purchase is involuntary. The value the recipient places on the gift is virtually irrelevant, except insofar as it enters the utility function of the gift giver. Thus, if the recipient reports to the gift giver disappointment after receiving the
gift, this may cause some EX POST deadweight loss, just as any mistaken consumer purchase. Or even rarer, if the recipient actually places a negative value (rather than just a lower value than the price) on the gift, this MIGHT also generate some deadweight loss even if the giver is unaware of the fact. Notice, this last is most likely to apply to an
insulting monetary gift, which therefore cannot be most efficient, despite what Chris says. I know that the non-monetary gift as a supposed example of deadweight loss has even found its way into texts, but it is based on a misunderstanding of welfare economics.

What about Chris’s second idea in the interview that the purpose of giving is to signal? I agree with that and I’m glad that years ago I came to that conclusion. I made piece with the idea of gift giving, a peace that has helped my 28-year-old marriage survive and, typically, thrive. But I don’t agree that the key is for the gift-giver to signal by bearing a high cost. That might be true for some gift recipients; it’s not true for the recipient I know best–my wife. What I’ve learned over the years is that the “signal” my wife values is that she is visible to me–that I’ve noticed what she likes and doesn’t like. So, for example, one of my biggest victories, when I was on sabbatical in Australia, was buying for her Christmas present three tickets for the stage play, “Shirley Valentine,” because that is one of her favorite movies. I rarely hit such home runs, but at least I understand the “game.”

Jeff points out:

If the problem with monetary gifts were ONLY costly signaling, as Chris repeatedly implies, why wouldn’t simply increasing the value of a cash gift solve the problem? He never adequately explains how asymmetric information has anything to do with gift giving, nor the exact signaling problem involved with a pure cash gift. It clearly involves much more than just the cost to the giver. [ME: I agree; thus my point above.] Here is Greg Mankiw’s somewhat clearer, although still incomplete, explanation of what is going on. Notice, Mankiw does not claim that non-monetary gifts generate deadweight loss.