All entries for Tuesday 24 December 2013

Why Exactly Did She Give Me That?

Writing about web page http://ideas.repec.org/s/eee/givchp.html

It's sometimes suggested that festivals of giving and receiving challenge the theoretical foundations of mainstream economics. Not so. Christmas is a challenge, but it isn't abstract or theoretical; it's empirical and deeply personal.

How would Christmas be a theoretical challenge to economics? Most economists build their models on rational actors that pursue self-interest. I give you a gift. If my giving benefits you at my own expense, does giving undermine the axioms of the model? Not really. There are many ways to interpret giving in terms of rational choice. Here's a few.

• Love. I love you, so my utility internalizes yours. If my gift makes you happy, I'm happy too.
• Commitment. I signal my commitment to you by giving you an expensive gift. If you accept my commitment, we can do things together (like rearing a family) that we couldn't do separately.
• Competition. I compete for your affection by displaying my surplus resources. By making you a gift more expensive than any my rivals can afford, I can win the contest.
• Signalling. By selecting particular gifts (or store vouchers), rather than money, we signal particular types of affective relationships. Some gifts are considered romantic, and other utilitarian. When exchanges match, your position in my world is confirmed; when they are discrepant (you give me perfume, I give you a scrubbing brush) it is undermined. Either way, I learn something useful.
• To create an obligation (as Sheldon says in The Big Bang Theory, "You haven't given me a gift, you've given me an obligation"). I make you a gift, in return for which I will call in a favour at a time of my choosing.

These are a few possible explanations of giving and receving in general. One might also want to explain festivals of giving and receiving when everyone does it together:

• Herding. I gain utility from doing what everyone else does. If everyone else is giving and receiving, I'm happy to feel part of it by doing the same. (Not everyone is like this; a minority will gain utility from standing aside.)
• Coordination. It's more fun if we all do it at the same time; also, devoting a few days each year to systematic giving may reduce the chances of anyone being left out of our circles of commitment and obligation by mistake.

In other words, relatively simple extensions of the basic economic model based on rational individual choice can easily support explanations of giving, including festivals of giving and receiving. So the challenge of Christmas is not theoretical; it's not hard to explain the general phenomenon. The challenge is to explain giving in particular: For any specific gift, which is it, of these (or many other) possible explanations that applies?

Christmas is a challenge for everyone, not just for economists. Tomorrow, as you sit amidst the wrapping paper, ask yourself: Now, why exactly did she give me that?

Merry Christmas!

Mark Harrison : 24 Dec 2013 12:37 |  Tags: Christmas Economics |  Comments (0) |  Close comments |  Report a problem