Economics of a gift economy

The gift economy seems like a pretty straightforward concept, people giving gifts to each other. However, there are a bunch of subtleties involved in the gift giving culture. In its purest form, we look at gift giving as a transfer of property rights over objects. For example, if person A gives an apple to person B, we can assume that is the end of the story. No money changed hands, and person A has no expectation of reciprocation from person B. Person A is also assumed to gain no influence or other non-tangible benefits from their gift, other than perhaps a "warm glow" or happy feeling. In reality though, a gift giving economy cannot thrive without other ulterior motives attached to this giving.

Often times, gifts are given with the expectation of future reciprocity, or some other motive (such as prestige). For example, during a potlatch, those involved would exchange or destroy wealth as a means to show power. Those involved with the ceremony would be challenged to give away more (in the form of gifts) than the host. If the sum or their wealth was deemed inferior to the hosts gifts, they would lose face or honor. This helped create an incentive for people involved in a potlatch to give away more and more gifts. The economic effects and incentive for this behavior are twofold. Firstly, it provides an incentive to transfer wealth from rich to poor. Instead of charity, or taxes, societies can use the social power of "face" or honor to create an incentive for this transfer. Second, those with wealth essentially "buy" influence through the gift of goods, rather than buying it directly or through violence. Finally, it is possible for maintain some sort of sustainability by gifting or destroying excess resources, because unabated growth is the cause of most environmental and over population issues. However, firm evidence on this sustainability reason has not been proven.

We can see that gift giving occurs, generally because it makes people feel good or because their is a societal influence to do so. Other examples around the world include Thailand, where it is customary for the oldest or most affluent to pay for meals during large gatherings. It is not rare to see younger, or less affluent individuals stare reluctantly at the check, or hand it to their elder without even thinking about it. Donations and charities in multiple countries also provide examples of the gift giving economy. Tax deductions and promises of buildings being named after benefactors offer incentives for those with wealth to gift it to others. Some even gift anonymously, suggesting that the warm fuzzy feeling is enough to justify the wealth (or perhaps alleviation of guilt).

However, gift giving economies have been shown to be inefficient, with cash being the pareto optimal gift. The idea is that if you give a gift to someone, the best case scenario is that you spend your money in the exact manner they would (eg. if they want an Xbox, you buy them an Xbox). Any other gift will result in lower consumer surplus for the recipient representing a deadweight loss. If goods are destroyed during the process (which can occur in a potlatch economy) even more loss can be created.