The dynamic efficiency of gifting.

In his Scroogenomics , Joel Waldfogel argues that gifting creates enormous deadweight loss, as individuals give one another gifts that they do not want or cannot use. He views efficiency as static, calculating the gains from trade (or gifting) at the moment of transaction. A puzzle arises, however, when one realizes that gifting has been a nearly ubiquitous institution throughout history. If gifting wastes valuable resources, why does it persist? We argue that gift giving is dynamically efficient despite the possibility of generating short-term deadweight loss. A well-functioning market economy requires expanded social networks and trustworthiness among anonymous and quasi-anonymous exchange partners. Gifting allows individuals to signal trustworthiness by offering 'burnt sacrifices'. Gifting practices that include a willingness to sacrifice via reciprocity norms, public visibility and ritual will tend to promote generalized trust. We consider these four elements – sacrifice, reciprocity, publicness, and ritual – to be critical institutional design principles for fostering dynamic efficiency. Our essay contributes to the literature on institutional economics by prompting scholars to think about the long-term (dynamic) efficiencies generated by cultural practices that appear inexplicably inefficient. [ABSTRACT FROM AUTHOR]