New Thoughts on the Gift Giving Puzzle
Economists, especially those familiar with Gary Becker's analysis of altruism, find the practice of giving gifts puzzling for two different reasons.
If, as a Becker altruist, I take your utility as one of the things I value, the obvious way to increase it is by giving you money and letting you spend it. While there are exceptions, in most other contexts we assume that each individual knows what is in his interest better than others do. Gifts, however, are usually things, not cash.
Becker altruism implies, roughly speaking, that from the altruist's point of view there is an optimum division of the combined income of altruist and beneficiary between the two, a division that maximizes the altruist's utility. If the beneficiary already has more than his share, the result is a corner solution--no transfer. If he has less, the altruist transfers money to him until that division is reached--that being the point at which an additional dollar of transfer costs the altruist as much in lost utility from his own reduced consumption as it gains him in increased utility from the beneficiary's consumption.
One implication of this is that, when transfers occur, they should be large. How likely, after all, is it that my beneficiary's share of our combined income, adding up to many tens of thousands of dollars, will be precisely five dollars less than the optimum? Yet gifts are usually small.
I think I have a possible solution to these puzzles, but explaining it requires a digression.
Economists find it useful to think of utility as a single thing, combining all sorts of values. But as individual actors, it doesn't feel that way. When I decide whether or not to have an ice cream cone, my behavior can be modeled as an attempt to maximize the present value of my utility stream, trading off pleasure today against the negative consequences of present calories for future welfare. But what it feels like is more a conflict between two me's, a short term pleasure maximizer and a long term utility maximizer, with the latter using various stratagems in attempting to control the former.
Suppose what the altruist values is not the welfare of the beneficiary as economists define it--the present value of his utility stream--but his happiness, his current happiness, making the gift giver the ally of the short term me. Give me money and the long term me might insist on putting it away for our old age. Give me a box of candy and there is nothing to do with it but eat it.
This also explains the small size of gifts. I can use an almost unlimited amount of money to provide for my old age or to insure against medical risks. But there is a fairly low limit to how much candy I can eat--more generally, to how much happiness you can provide for me today by giving me stuff. And if your utility function exhibits declining marginal utility for my happiness, that effect can be expected to show up much faster than if it exhibits declining marginal utility for my utility.
The final question is why humans might have this sort of modified Becker altruism. Becker has offered an interesting evolutionary explanation for altruism. The environment we evolved in did not contain savings accounts, annuities, insurance policies. Given the constraints of that environment, short term benefits may have been all it was practical to produce or observe. Hence we may have ended up as altruists targetting the current value of happiness rather than the present value of utility.
[Curious readers can find a summary of Becker's analysis of utility in the chapter of my Price Theory devoted to love and marriage. Look for the subhead "The Economics of Altruism."]