“Forced Gifts: The Burden of Being a Friend” by Ruixin Wang
Hong Kong Baptist University
Peking University, China & IFPRI
Tsinghua University, Beijing, China
In China and other developing countries, gift giving contributes to facilitating risk sharing by solving limited commitment problems. When effective contract enforcement is lacking, people rely greatly on friends to share risk since emotional (and moral) costs of defaulting to friends help to prevent moral hazard. The challenge is how people can distinguish between friends and non-friends. We suggest, in this paper, that gift expenses may serve as a signal of friendship since giving a gift is less costly for a friend than a non-friend due to altruism. The model re-evaluates the role of gift exchange in developing economies, and helps to rationalize the large amount of gift-giving in China (10% of living expenditure). By using a unique data set of 26 village economies in rural China, we empirically examine the contribution of gift-giving to risk sharing. The detailed records of expenses on both gift-giving and hosting ceremonies help us to disentangle the signaling function of gift-giving from quasi-credits (Fafchamps (1999)). Our empirical findings also suggest a hump shaped relation between gift-giving and income level. This evidence is consistent with our model prediction, highlighting the instrumental value of gift-giving in risk sharing.