In search of welfare-improving gifts

Gift giving is thought to decrease welfare. Recipients are sometimes stuck with gifts they would not have purchased because the giver does not perfectly know the recipient’s preferences and in-kind gifts cannot be costlessly refunded. Such gifts are welfare reducing compared to giving cash if, in addition, recipients possess full information as to which stores carry their desired goods and the ability to reach these stores costlessly. We replace these two latter assumptions with the more realistic assumptions of uncertainty about the location of goods and search costs. In contrast to existing economic models, gifts in our model enhance expected welfare. Moreover, gift giving cannot be replaced by a profit-maximizing trader nor the introduction of nearby specialty stores carrying gift goods. We use our model to explain a number of stylized facts about gift giving, the organization of retail trade and in-kind government transfers. keywords: gift giving, search, welfare, retailing, refunds. Journal of Economic Literature classification numbers: A12, D01, D60, D83. ∗Contact Information: Kaplan: Department of Economics, University of Exeter, Exeter, UK, e-mail: [email protected], tel.: +44-1392-263237, fax: (530) 871-6103; Ruffle: Department of Economics, Ben-Gurion University, P.O.B. 653, Beer Sheva, 84105, Israel, e-mail: [email protected], tel.: +972-8-6472308, fax: +972-8-6472941. †Acknowledgements: We thank Rachel Croson, Thesia Garner, David DeMeza, Sara Solnick, Richard Sosis, seminar participants at Ben-Gurion University, an area editor of this journal and especially two anonymous referees for valuable comments.