“Forced Gifts: The Burden of Being a Friend”

Erwin Bulte, Wageningen University

Ruixin Wang, Hong Kong Baptist University

Xiaobo Zhang, Peking University

Generous gift giving fosters reciprocal relationships. Yet it can also be a source of social status in local communities. As incomes rise, in several developing countries, gift expenses appear to be escalating––rising more rapidly than incomes. We develop a theoretical model to demonstrate how (unequal) income growth may trigger “gift competition” and drive up financial burdens of gift expenses. We use unique census-type panel data from rural China to test our model predictions and demonstrate that (i) the value of gifts responds to the average gift in the community; (ii) the escalation of gift giving may have adverse welfare implications (especially for the poor); and (iii) escalating gift levels crowd out expenditures on other consumption items.