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Tuesday, April 05, 2005

The Economics of Altruism: What's Wrong with Cash?

You have to be careful when you are around Bill Harbaugh. As explained in a recent post, Bill is an experimentalist who explores how children learn about economics. But his experiments are not limited to children; he could be doing one on you:

Dave: Feel like going for coffee?

Bill: Sure.

They arrive at Café Roma:

Dave: What do you want? I’ll buy.

Bill: I actually don’t feel like having any coffee, I’ll just take the money instead.

Bill is quite serious about wanting the money. Dave is offended that Bill would ask for the money instead accepting his offer of coffee. But why? Would you be offended if someone asked you for the money after you offered to buy them coffee? What if you invited someone to lunch and the person asks you for $10 instead of eating any food? They still keep you company so there's no difference there, they just want money instead of the food.

Why does Dave prefer to give Bill $2.50 in coffee rather than simply handing him the money? What is the economics of this?

[A clue might come from the papers on the economics of Christmas if you are familiar with those. These papers also wonder why gifts are often, but not always, preferred to cash (e.g. if you have JSTOR access, see "The Deadweight Loss of Christmas," by Joel Waldfogel (American Economic Review, December 1993), pp. 1328-1336; "The Dead-Weight Loss of Christmas: Comment" by Sara J. Solnick and David Hemenway (American Economic Review, December 1996), pp. 1299-1305).]

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