Forced gifts: The burden of being a friend.

Highlights l We model the causes and welfare impacts of the competition of gift giving. l We study gift competition and its impacts by using a unique database in China. l People respond to the average cost of gifts given in their community. l The escalation of gift giving has adverse welfare impacts. l Increasing gift expenditures squeeze spending on other consumption items. Abstract In many developing countries, gift expenses escalate with income growth and account for a substantial share of household expenditure. We develop a theoretical model to demonstrate how (unequal) income growth may trigger "gift competition" and drive up the financial burden associated with gift exchange. We use unique census-type panel data from rural China to test our model predictions and demonstrate that (1) the value of gifts responds to the average gift in the community, (2) the escalation of gift giving may have adverse welfare implications (especially for the poor), and (3) escalating gift expenses crowd out expenditures on other consumption items. [ABSTRACT FROM AUTHOR]