The Value of Gifts
Gifts can be more valuable to the recipient than an equivalent dollar sum.
On July 19th, I turned 23. (I’m too old to be a rising senior). I am now at the age where I derive immense satisfaction from receiving socks and pants as gifts.
Didn’t excite me when I was 8 years old; now it does.
But slacks and dress socks were not my only gifts! I knew I needed these and, if I had received their value in dollars, might have spent the sum on socks and pants of equal or greater utility to me. After all, unlike my gift givers, I have perfect knowledge about my utility function.
Or do I?
The other major gift I received was something I should have known I should buy but did not and was not going to purchase.
The gift: a fancy lightweight carry-on, courtesy of my mom and dad.
Specifically, my mom—sorry, dad!
My mom noticed all of the traveling I was doing (to various liberty space functions, conferences, etc.) and decided to get me something I myself didn’t realize I needed. The point: a third party, through careful observation of me, knew what I needed, i.e., what I derive the most utility from, more than I did.
This flies in the face of the thesis an article I read in my intermediate microeconomics class two summers ago: Gift-giving creates deadweight loss that could be averted by giving people direct cash transfers instead of in-kind gifts. I rejected this argument at the time on other grounds. Namely, that the gift-giver derives more utility from giving a present instead of cash so, factoring their utility into the equation, in-kind gift-giving can lead to more utility even if the gift-recipient’s utility isn’t maximized.
What I didn’t realize at the time — but should have — is that the article’s thesis is predicated on the assumption that recipients know their preferences better than others, and that they act in a rational, utility-maximizing fashion.
These are standard assumptions in neoclassical economics and are largely true.
Largely.
Not absolutely.
If I had received cash from my parents, I would have spent it, in all honesty, in a manner less conducive to my happiness than the fabulous monogrammed carry-on I now own.
TL;DR: Gift-giving is a powerful argument for the efficiency of in-kind transfers.
P.S. Thank you, mom!