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Shopping: the receiver travels to the store and buys the good, the social ... gg>0>shop, gg>shop>0, shop>0>gg, shop>gg>0. Why is gift giving still made? ...

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Slide 1:Gift Giving

Slide 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?

Slide 3:Summary of gift survey. If you are an aunt, donít 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).

Slide 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 recipientís 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."

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

Slide 6:Two ways of getting the good Shopping: the receiver travels to the store and buys the good, the social benefit is a (v-p)-c Gift Giving: the giver gives the good to the receiver, the social benefit is a v-p When is gift giving better than shopping? a v-p> a (v-p)-c Or c>(1- a )p Thus, we have gift giving if c>(1- a )p and a v>p

Slide 7:Interpretation of requirements Gifts when c>(1- a )p and a v>p Grandmother effect: when a is low, give cash since a v<p. When a is high, gifts are better option than buying it oneself: best friends. When c is high, gifts are better. v doesnít affect which method is superior. Examples: what is the social value of gift giving, a v-p, and shopping, a (v-p)-c, when (c,v,p,a)=(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

Slide 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? Canít they just charge money?

Slide 9:Why not trade instead of give? Canít 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 a). 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,a)=(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.

Slide 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 a ). The giver may at other times see other products with lower a . 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.)

Slide 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 donít want to fight a strong type.

Slide 12:Signalling in the Lab:Treatment 1

Slide 13:Signalling in the Lab:Treatment 1

Slide 14:Signalling in the Lab:Treatment 1

Slide 15:Signalling in the Lab:Treatment 1

Slide 16:Treatment 2.

Slide 17:Treatment 2.

Slide 18:Treatment 2.

Slide 19:Treatment 2.

Slide 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).

Slide 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.

Slide 22:Types of equilibria Separating. Strong signal Weak donít signal. Pooling. Strong and weak both send the signal. (or Strong and weak both donít send the signal.)

Slide 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.

Slide 24:Treatment 2: Other pooling?.

Slide 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 tribeís most valuable possession.

Slide 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 havenít 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.

Slide 27:Valentineís Day Who bought a card, chocolate, etc? We are forced to spend in order to signal that we ďreallyĒ 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 didnít buy the card, your partner would assume that you are not serious and break up with you.

Slide 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 doesnít mean so much, you wouldnít 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.

Slide 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.

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

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