The moral limits of markets (1): of fines and gifts

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gifts

Israeli nurseries are particularly famous amongst economists (at least, amongst experimental economists). An already classical study 1 shown that, following a ‘natural experiment’ in which some day-care centers opted for issuing a fine to parents for late children’s pickups, while other nurseries didn’t, not only helped to decrease (as expected) the frequency of late pickups, but actually increased it. How can such an absurd result occur? How can fining a behaviour enhance that behaviour, instead of deterring it? As the authors of that study suggested, the reason has to do with the moral perception of the ‘fine’ by the subjects that decide whether to perform the action or not; or stated differently, it has to do with how the ‘fine’ is seen within a context of social norms. The introduction of the fine in those nurseries may have changed the perception parents had of the situation: they may have interpreted the action of the teachers when these remain taking care of children after the school hours as a generous, nonmarket activity. Parents may have thought: “The contract with the day-care center only covers the period until four in the afternoon. After that time, the teacher is just a nice and generous person. I should not take advantage of her patience.” The introduction of the fine changes the perception into the following: “The teacher is taking care of the child in much the same way as she did earlier in the day. In fact this activity has a price (which is called a ‘fine’). Therefore, I can buy this service as much as needed.” Parents felt justified in their behaviour by a social norm that approximately states “When help is offered for no compensation in a moment of need, accept it with restrain; when a service is offered for a price, buy as much as you find convenient”.

The Israeli nursery natural experiment shows, hence (or so has been mainly interpreted) that people behave differently under monetary incentives depending on whether these are seen as ‘prices’ or as ‘sanctions’. When a fine is imposed for some action, this does not only reflects the (private or social) costs associated to that action; the fine also means that the action is wrong. Hence, eliminating the perception of wrongness associated to a fine, i.e., transforming it into a ‘mere’ price, can affect the effectiveness of the fine.

Another similar case is that of Finnish speeding tickets (traffic fines), which are not established as a constant amount, but consist in a proportion of the infractor’s income. Some fines have reached hundreds of thousands of euros, for particularly wealthy infractors (e.g., Nokia executives). Finnish speeding tickets are fines rather than mere ‘fees’ not just because they vary with income: after all, progressive income taxes also vary with income, but they are not fines, they do not ‘penalise’ income-producing activities (pace the complaints of some radical libertarians). It is the sense of opprobrium associated with the speeding tickets (and the publicity derived from this) what constitutes the ‘penalty’ 2.

Consider now an opposite case, not one in which you are forced to pay for something, but one in which you are receiving something: gifts (e.g., birthday or Christmas gifts). From the point of view of neoclassical economics, the practice of gift giving is the nearest possible thing to absurdity. Usually, none of us would prefer that his or her salary were paid in kind, rather than in cash (if taxes were identical, if inflation is not rampant, etc.): you can exchange your cash for whatever you want, but it is much more difficult to transform into anything else a payment made in kind. Regarding gifts, from the point of view of an economist, it is clearly inefficient giving a gift instead of a money transfer. If your friend, lover, etc., gave you an amount of money, you would expend it (according to textbook microeconomics, at least) in the way you preferred the most (even saving it, or a part of it, perhaps); but if he or she gave you a present, it is rather unlikely that it would exactly coincide with the thing you’ve had bought with an equivalent amount of money. This means that, given the option, you would not expend as much money in buying your ‘present’ as in buying what you had bought with that amount of money. The difference between both quantities is an economic inefficiency, a ‘deadweight loss’, so to say. Some studies estimate that the ‘value destruction’ due to the practice of gift giving is in the order of 13 billion $ per year in the U.S. 3.

But, in the face of this economic ‘argument’, the practice of gift giving persists (though the practice of wedding registries, and especially gift cards, that now can even be re-sold online, reducing in that way the ‘social deadweight loss’). Why is it that we still consider making gifts in kind more valuable than offering gift cards or even sheer cash? The reason why money gifts tend to diminish the perceived value of gifts, and even to destroy the value of the practice itself, is related to the reason why money can’t buy friends (a hired friend is not the same as a real one): friendship, and the social practices sustaining it, are constituted by certain norms, virtues, and attitudes (sympathy, generosity, thoughtfulness, attentiveness, etc.). Commodifying these practices replace them with market values (efficiency, economic welfare, anonymity), which are not bad in themselves, but that cannot support the whole of our social live. Markets can corrupt the expression of friendship and love.

This also relates to other types of honorific goods: you just cannot buy a Nobel prize (or, if you manage to do it, but the plot is discovered, you will not get from the prize what you are expected to enjoy). You cannot just buy a university degree (not the right to study in a university in order to get it, but the degree itself), or better, if the practice of buying academic titles expanded, it would reduce the (economic, social, academic, etc.) value of the titles themselves.

Paraphrasing Pascal, we could say social and moral practices (and norms) have reasons that economic reason does not understand. In the next entry we will examine in a more systematic way the reason why markets should have moral limits.

References

  1. Gneezy, U., and A. Rustichini. 2000. “A Fine Is a Price.” Journal of Legal Studies, 29(1): 1–18
  2. Sandel, M., 2012, What money can’t buy, Farrar, Straus, and Gimroux, New York. Chapter 2
  3. Waldfogel, J., 2009, Scroogenomics, Princeton University Press, Princeton

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José Luis FerreiraJosé Luis Ferreira

We’ll wait until the next entry, but there is a number of possible economic reasons for gifts. A couple come to mind:

(i) People like surprises.

(ii) Gifts work as costly signals to show sincere love or friendship.

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