Summary of JOIE article (18 August 2022) by Anthony Gill, Department of Political Science, University of Washington, Seattle, Washington, and Michael D. Thomas, Department of Economics and Finance, Heider College of Business, Creighton University, Omaha, Nebraska. The full article is available on the JOIE website.
In Scroogenomics, Joel Waldfogel argues that gifting creates enormous deadweight loss, as individuals give one another gifts that they do not want or cannot use. He views efficiency as static, calculating the resource transfer at the moment of transaction. A puzzle arises, however, when one realizes that gifting has been a nearly ubiquitous institution throughout history. If gifting wastes valuable resources, why does it persist? We argue that gift giving is dynamically efficient despite the possibility of generating short-term deadweight loss. A well-functioning market economy requires expanded social networks and trustworthiness among quasi-anonymous exchange partners. Gifting allows individuals to signal trustworthiness by offering “burnt sacrifices.” We consider these four elements – sacrifice, reciprocity, publicness, and ritual – to be critical institutional design principles for fostering dynamic efficiency. Our essay contributes to the literature on institutional economics by prompting scholars to think about the long-term (dynamic) efficiencies generated by cultural practices that appear inexplicably inefficient.
We are most interested in how gift giving forms trust, first among individuals and then among disparate groups. We borrow from Elinor Ostrom’s set of design principles for solving common pool resource (CPR) problems, each principle being “an essential element or condition that helps to account for the success of these institutions in sustaining the CPRs and gaining the compliance of generation after generation of appropriators to the rules in use” (1990, 90).
In our case, we identified four key design elements – sacrifice, reciprocity, public visibility, and ritual – which assist in promoting generalized trust. We argue that it is trust that makes gifting dynamically efficient. Sacrifice and reciprocity help define the social context of gifting. Public visibility and ritual allows these social institutions to extend to groups with greater anonymity.
Sacrifice is necessary for something to be a gift. If we assume people are truly willing to give up some of their own surplus for us (or for others) then we credit them with trust. Sacrifice is costly, but if that sacrifice creates a longer term relationship, then the cost is spread out over many rounds of interaction, as identified by Iannaccone (1992). The social context evolves a set of intuitions that help us to know if someone is trustworthy or, in the opposite case, a free-rider. Giving an engagement ring or sharing food with a stranger, both of these sacrifices convey information about the giver that would be costly to do repeatedly if they didn’t intend to cooperate. Trust matters even in a world with contracts because one can never fully specify all the contingencies that might happen after the contract is signed. Two parties that trust each other are in a better position to renegotiate unanticipated outcomes. Beyond this simple calculus though, cooperation and trust make it more pleasant to interact with one another, a victory for a more humane economy.
Reciprocity is important because, if Waldfogel is right, we lose resources with every gift exchange. Even saying thank after buying a candybar could be seen as inefficient rhetoric. In our view, trust develops via repeated exchange and becomes a generalized norm when widely practiced in society. You get so good at reciprocity that you go first even when you are not certain that particular person will respond in kind. We do ultimately invoke sanctions on those who do not respond in kind, but our primary reason to exchange is that it is just better to be part of a high trust group. Observing reciprocity in gift exchange allows us to calibrate our trust levels in groups without waiting to experience an emergency to see how people behave under pressure. The result is greater cooperation and wealth.
Public visibility reinforces the norms and creates third party effects. If we observe someone giving gifts, we gain information about the giver that does not only rely on the gifts presented. We evaluate the behavior according to the expectations that we have about gifts and think more highly of those that share the same understanding and norms. When someone makes a special effort to give out great Halloween candy they create information about how they view the community. I may not even trick-or-treat, but hearing of the house that gives out full-sized candy bars leaves me with a positive impression. These examples help develop broader understandings of civic participation that the kids observe and help us to understand how our cooperation extends over time as opposed to one-shot games of quid-quo-pro.
Ritual reinforces gifting norms. We all know the rules for Valentine’s Day. To give something practical on this holiday is to misunderstand the widely accepted celebration of frivolity. We express ourselves with flowers and candy demonstrating that we understand the rituals. Our behavior telegraphs our group membership along well understood memes. Wearing green on St. Patrick’s day endorses the festivity even if we don’t all frolic to the same degree. Businesses seize on every opportunity to get in on this game and as a result show their more humane side. Well-practiced rituals reinforce gift-giving.
Gifting helps us practice what Adam Smith called beneficence, those actions that bind a community together that are more complicated than simply getting justice right. We seek to be loved, which requires us to go beyond simply getting our fair share. That we continually emphasize the importance of giving and gracious receiving is a reminder of how people unknown to us are not enemies but individuals who can work together with us to build a more prosperous and peaceful society.
Iannaccone, L. R. (1992). ‘Sacrifice and Stigma: Reducing Free-riding in Cults, Communes, and
Other Collectives.’ The Journal of Political Economy. 100(2): 271–91.
Ostrom, E. (1990). Governing the commons: The evolution of institutions for collective action. Cambridge:
Cambridge University Press.
Waldfogel, J. (1993). ‘The Deadweight Loss of Christmas.’ The American Economic Review. 83(5):
Waldfogel, J. (2009). Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Princeton: Princeton University Press.