Gift giving is a long-standing social tradition that generates high revenues for retailers. Ironically, gift giving has long been criticized as welfare reducing, because many gifts are not valued as much by the receivers as their costs to the giver. Previous research attributed this welfare loss to givers' inaccurate predictions of receivers' preferences. Moreover, the welfare gain from gift giving has been largely ignored, due to the underlying assumption that receivers are fully informed of their own preferences. In Essay l, I demonstrate that reduced price sensitivity is another important source of the welfare loss of gift giving, as givers use gift prices to signal the importance of their relationship with the receiver. I develop a new Bayesian gift choice model that captures both p...[ Read more ]

Gift giving is a long-standing social tradition that generates high revenues for retailers. Ironically, gift giving has long been criticized as welfare reducing, because many gifts are not valued as much by the receivers as their costs to the giver. Previous research attributed this welfare loss to givers' inaccurate predictions of receivers' preferences. Moreover, the welfare gain from gift giving has been largely ignored, due to the underlying assumption that receivers are fully informed of their own preferences. In Essay l, I demonstrate that reduced price sensitivity is another important source of the welfare loss of gift giving, as givers use gift prices to signal the importance of their relationship with the receiver. I develop a new Bayesian gift choice model that captures both preference predictions and the signaling value of price. The model is estimated on two choice-based conjoint studies for gift giving. Both studies show the strong signaling value of price, especially when givers are uncertain about receivers' preferences. Decomposition of the welfare loss shows that the signaling value of price is an important source, especially in markets with heterogeneous prices. In Essay 2, I investigate under what conditions gift giving could lead to welfare gains. I build a Bayesian empirical model to test hypotheses about these conditions derived from an analytical model. With a unique dataset from a paid online knowledge sharing platform, I find that gifts can be welfare improving, especially when receivers purchase infrequently, and givers are experienced and have similar preferences as the receiver. I also compute the distribution of welfare gains and losses across gifts and find that a significant number of gifts lead to welfare gains. These findings contribute to marketing and gift giving literature and have key implications for the gift industry.