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A gift economy is a system of exchange characterised by delayed exchange on the basis of the principle of reciprocity. I.e. where a market seeks to exchange goods in immediate transactions without further obligations, in a gift economy goods are "gifted" with the social expectation of reciprocation at a specified or unspecified time in the future. Failure to reciprocate adequately results in lower social prestige, and vice versa with reciprocating even more than what was received.

Interestingly, this is the mode of exchange that dominated most of human history, in particular prior to the agricultural revolution.

Even more interestingly, case studies with the "moka exchange" system in the highlands of Papua New Guinea have shown that gift economies suffer from boom-bust debt cycles, just like market economies.

This has led me to wonder, do gift economies tend towards Pareto efficiency as is characteristic of market economies with efficient supply, demand and exchange, and if yes, are the prerequisites for such Pareto efficiency different in gift economies?

The only studies I could find that remotely attempt to answer the question unfortunately primarily dealt with altruistic "pure gifts", not "reciprocal gifts".

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    $\begingroup$ What is the difference between a 'reciprocal gift' and an exchange? This is a rhetorical question trying to point out that if you define 'reciprocal gift' in terms of the utility of agents it is hard to see how what you are talking about is any different from a simple exchange economy. A gift is not really a gift if you are supposed to 'pay'/'reciprotate' with something of equal value. $\endgroup$ Dec 3, 2021 at 13:49
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    $\begingroup$ Can you please support your claim that "market economies with efficient supply, demand and exchange" "tend towards Pareto efficiency" in practice, as you seem to imply? Or explain what you mean by this, since this seems to be a very theoretical concept? $\endgroup$
    – Giskard
    Dec 3, 2021 at 14:07
  • $\begingroup$ What you call gift economy would in most economics be considered barter economy. Barter is just exchange with absence of money. Gift economy is just name social anthropologist give to what economists understand as barter, because in social anthropology barter involves immediate exchange of two goods (the terminology is often different between different fields). Consequently, in economics you should try to search literature for barter (This is why you could only find studies that deal with pure gifts not reciprocal gifts, in econ if you are expected to pay back for a gift you are bartering). $\endgroup$
    – 1muflon1
    Dec 3, 2021 at 14:19
  • $\begingroup$ @JesperHybel The reason it's hard to characterize these so-called "gifts" as mere exchanges is because reciprocation is not mandatory, and the thing being exchanged back is not necessarily agreed upon beforehand. Lack of full reciprocation impacts social status (and inversely over-reciprocation raises your social status), but gift economies appear to fundamentally be about the relationship between two people, rather than the goods themselves, as in a market. $\endgroup$
    – Vlad
    Dec 4, 2021 at 12:13
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    $\begingroup$ @1muflon1 That's really interesting. So you're saying that gift economies are just systems of barter without any of the disadvantages typically associated with barter, and with a form of debt? Wikipedia says that "Economists [not Anthropologists] distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not one delayed in time.", but this statement appears to be completely uncited. $\endgroup$
    – Vlad
    Dec 4, 2021 at 13:47

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Any market will always come to a Pareto optimum for that market. Free exchange will always do that. Pareto optimal states are states where no trade can make an actor better off without making the counterparty worse off. There are states where one actor gains more than another loses, but a market of utility-seeking actors will not cause that transfer to happen because all market transactions are consensual. As an example, neither monopolies and externalities prevent reaching a Pareto optimum, however they may prevent reaching a state more optimal than any Pareto optimum.

The question is not whether it will get to a Pareto optimum, but whether there are more optimal states than the Pareto frontier that can't be reached by the market rules.

In a gift economy, people give gifts and expect unspecified gifts in return in the future. What this mean is that it is an exchange, but one with high error bars. You might not know when or how much you'll be compensated, but you only participate because your expected value is positive. Much of this value comes from social ties, but the point still stands.

Therefore you should expect that a gift economy will be able to achieve approximately as optimal a state as a monetary economy. However, you should expect this process to take enormously longer because of the high degree of uncertainty and time lag that reduces the number of "trades" that will end up economically positive, and fogs the information necessary to optimize the efficiency of trades.

As a side note, gift economies are absolutely not the same as barter economies. You could think of them as barter where the goods in question are vague statistical expectations of what will be received in return, but this isn't really a standard way to think about it. In gift economies, people give gifts with the expectation of unspecified gifts in return while in a barter economy people decide what to trade up front. They are very clearly not the same.

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    $\begingroup$ There are several known textbook cases of a market allocation not being Pareto efficient. E.g.; 1. market power 2. externalities 3. asymmetric information. These are not special cases, most real world situations involve at least one of these. (-1) $\endgroup$
    – Giskard
    Aug 31, 2023 at 19:22
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    $\begingroup$ Funnily enough, you yourself quote these in an answer you wrote shortly before this one! Not sure why, in this case, you would write here that "Any market will always come to a pareto optimum for that market. Free exchange will always do that.." $\endgroup$
    – Giskard
    Aug 31, 2023 at 19:25
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    $\begingroup$ "Market power, for example, does not result in situations where any market actor refuses to make a trade that isn't good for them." To be clear, are you claiming that a market where the only supplier is a monopoly will result in a Pareto Efficient outcome if all agents act rationally? Just want to clarify this because I think this is a statement most students should be familiar with. $\endgroup$
    – Giskard
    Oct 3, 2023 at 9:51
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    $\begingroup$ Sorry, but no. I would like you to include your claim "a market where the only supplier is a monopoly will result in a Pareto Efficient outcome" in your answer. This is very easy to interpret for people just glancing at the answer. $\endgroup$
    – Giskard
    Oct 18, 2023 at 5:19
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    $\begingroup$ The statement that externalities do not cause Pareto inefficiencies would do, too. It is perfectly fine not to answer a question if one has no idea how to answer it. $\endgroup$ Oct 18, 2023 at 7:03

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