Seminar of Economic and Social Research Institute (N0.44)

Gift-giving and Risk Sharing: A Theory of Signaling and Evidence from Rural China

Seminar | April 28, 2017 | 1:30-3:00 p.m. | 106B conference room in Zhonghui Building
Speaker: WANG Rui-xin
Sponsor: JNU Economic and Social Research Institute

ABOUT WANG RUIXIN
Dr. Wang is currently a research assistant professor of the Hong Kong Baptist University Business School, once was Bachelor of Economics, Dalian University of Technology in 2008, Master of Economics, Hong Kong University of Science and Technology in 2009, and got the Ph.D. degree in Economics, Tilburg University, Netherlands in 2015. Before joining the Hong Kong Baptist University, he had a short visit at the International Food Policy Research Institute (IFPRI) in 2014. Dr. Wang Ruixin is mainly engaged in the development of economics and public economics. The research focuses on the (informal) system and policy factors that determine economic development. His thesis on risk sharing and cash gift contest has won the Best Paper Award on the first annual meeting of the China Society of Labor Economists (2016).

ABOUT THE LECTURE
This paper studies how gift exchange may help to overcome limited commitment problem in risk sharing. When efficient contract enforcement is lacking, people rely on friends (or relatives) to share risk since emotional or moral cost of defaulting between friends can help to prevent moral hazard. The problem is how to distinguish between friends and non-friends? Gift expense serves 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 exchange in China (10% of living expenditure). As a signal, gift exchange improves the efficiency in risk sharing and facilitates favor exchange, but I also demonstrate that the welfare gains due to this improvement may be offset by increased inequality. By using a unique data set containing detailed records about gift exchange in rural China, the empirical study suggests gift expenses, as a signal, significantly increase the probability of risk sharing. I also show further empirical evidence to the theory by testing more model predictions.