The Hindu Business Line : Why gifts are socially efficient

A friend picked up an argument with me over my article in this column last week. It was about how birthdays can be depressing when you do not get want you want. My friend contends that cash is always the best form of gift. That way the recipient can buy whatever she wants. His argument is economically correct. But, socially, it is not. Why?

You may spend Rs 3,000 to buy, say, a nice shirt or top for your friend. What if your friend does not fancy it? The gift might be worth less than Rs 3,000 to her. There is, hence, a deadweight loss — a gap between how much you spend on the gift and how much your friend considers it worth. A gift is, hence, economically inefficient.

But consider this. I call you for a party that I am hosting for recently remodelling my house. Borrowing from the North American custom, you think it would be appropriate to bring some wine for the party. But you are unsure whether I would like it or even drink alcoholic beverages.

Makes social sense

If you give cash, it would look as if you did not think hard enough about an appropriate gift. Besides, I may feel embarrassed to accept cash.

But what if you give me wine that I actually do not like? I may at best gift it to someone who calls me for a party! But importantly, I will appreciate your gesture.

Now, sometime later, suppose you plan to remodel your house. You call me, hoping to gain some knowledge from my recent experience with remodelling. What will my response be?

The wine that you gifted me would be a social lubricant. I will be willing to help. Gifts create a long-standing relationship. And if you gifted me something that I really liked, it would sit in my mantle for a long time. Cash loses its identity — I may use it to buy some grocery the next day!

Sometimes, economically inefficient process can make social sense. Gifts certainly do.

(The author is an investment strategist.)

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