Why Does Santa Claus Exist?

Every year, millions of parents propagate the myth of “Santa Claus”: an omniscient, magical man bringing near-infinite toys to children across the globe. Santa Claus employs elves and flying reindeer, lives in an inhospitable environment, and necessarily travels 0.5% the speed of light. Despite the obvious dubiousness of these claims, parents invest in the story regardless, taking children to see Santa, write letters to Santa, leave cookies at night, and—perhaps most costly—enforcing these beliefs collectively. Why? 

An alternative expression of the question comes from Gary Becker’s model of the altruistic family, wherein members maximize each other’s utility. Said model descriptively approximates relationships between adults, where a husband may purchase shoes for his wife if (a) she is not also at the store, (b) she would have purchased the shoes had she been there, and (c) the husband has this knowledge. But children are an odd exception to Becker’s model: their utility is not maximized as other family members’ are. We know this because a child with a parent’s income would own every toy or candy; that this isn’t happening is proof their utility functions aren’t being wholly considered in intra-family income distributions. 

To this point, parents claim children don’t know what’s best for themselves. Translated to economics, children don’t internalize the cost of their actions. In this sense, children are akin to drug addicts: their utility functions are so near-sighted that they ignore the costs on others and their future selves. So phrased, the question of maximizing children’s utility becomes one we’re more familiar with: how do we allocate to drug addicts, knowing their requests don’t internalize the costs on us and their near-future selves?

Becker comes close to addressing this issue with his “Rotten Kid Theorem,” which argues bad actors are still incented to internalize the costs of their actions because hindering your income supply, in turn, hinders your future income. In other words, rational actors don’t bite the hand that feeds them. But the Rotten Kid Theorem doesn’t account for actors with unusually high time preferences, such as actual children and drug addicts. Assuming parents want to maximize their children’s present utility function, how can they allocate resources such that these little drug addicts functionally internalize costs? 

For drug addicts, you (the income distributor) transfer income in an amount negatively relating to monitoring costs. This achieves a sub-par outcome for the income distributor, where they wish to spend more, but cannot for fear of the addict spending (or trading) for drugs. The case for drug addicts seems bleak, but what about children? What difference could exist between drug addicts and children that lead to, for instance, a superstitious fiction for gift-giving in the latter case but not the former? 

Two explanations persist: one preference-based (“it’s cute!”), the other what I call “behavior-check” theory: Santa Claus lets parents punish children, while removing themselves as the punisher. Dismissing preference-based explanations, the behavior-check theory relies on the “naughty list” Santa supposedly updates constantly; but behavior-check is unconvincing because Santa’s threat is never credible. One could argue that children don’t understand the lack of credibility, but once children’s mental capacity is considered, behavior-check makes even less sense: why would children, with incredibly short time horizons, care about a punishment they receive months later? 

I argue, alternatively, that parents utilize children’s gullibility to allocate what I call “seasonal” goods: stuff that can’t be distributed in frequent intervals, like expensive electronics or other items that can’t be consumed frequently (i.e., candy). Since children’s incomes are dependent on parents’, we should expect rent-seeking behavior. For example, constant requests for toys, candy, etc. A rational parent faces two choices: give in and purchase every item a child asks for, or allocate provisions below what children would buy with unlimited access to the family’s income.

Given parents want to maximize their children’s utility, but only such that costs appear internalized, they face the issue of opportunistic and rent-seeking behavior, where children know their parents could presently purchase items that would otherwise be rationed seasonally, but don’t have the appropriate time horizon to wait. You could say there is a contractual issue: parents would like to “contract” with their children such that some gifts are received seasonally (expensive items that can’t be provided often), but children are prone to “breach,” where they demand items sooner than later. 

For drug addicts, this contract seems impossible to enforce, and thus the solution is often to reduce distribution (null the contract entirely). Children’s gullibility allows for a more optimal outcome: a parent (income distributor) may remove themselves as the object of rent-seeking behavior and appoint somebody else. Perhaps, say, a jolly reindeer-riding saint. This yields some testable predictions, proving Santa Claus to be quite an effective reducer of deadweight loss. 

Removing oneself as the income-distributor may stop the negative effects of rent-seeking on oneself specifically, but it doesn’t reduce deadweight loss. If a parent appoints an uncle, the children will simply rent seek from the uncle, but via Coasean bargaining between family, the parent is still at a loss. Thus we should predict the appointed income distributor to be a stranger. But appointing an actual stranger still gives the child an incentive to rent-seek; their utility function, if maximized, will see resources then leave the family towards the stranger. Thus the deadweight loss is still affecting the family.

Another prediction, then: the family will appoint a stranger that is difficult to rent seek from. But also, the parent can capture the deadweight loss from children’s rent-seeking into a boon if, for whatever, reason, the stranger’s utility is maximized by the child acting “good.” In reality, no stranger has these incentives (unless they’re paid to; mall Santa, anybody?). Thus, we should expect that this stranger is fictional, so parents can capture benefit from children’s rent-seeking behavior. Finally, we should also predict this stranger to be only appointed when families actually have a disposable income for gift-giving; with no seasonal gifts, we shouldn’t expect said fictional stranger.  

Santa Claus, the ever-unreachable stranger commanding children to be “nice,” fits all these predictions. Santa allows parents to remove themselves as the object of rent-seeking behavior, and his location forbids children from engaging in direct rent-seeking. Instead, parents capture the value of children’s rent-seeking by maintaining that Santa is sueded only by the relative nicety of the children he distributes income to. Santa Claus also arose as a prevalent gift-giver after the industrial revolution and early in the 20th century, when families actually had a disposable income for children to rent-seek, and “seasonal” goods were allocated at all.

This counters the behavior-check theory by arguing that acting “nice” is merely a way of capturing the value expended in rent-seeking, not the impetus for Santa Claus itself (which is explained, as I argue, by the necessity to remove parents from the role of income distributor). Moreover, none of my arguments suggest parents’ rationale for Santa lies outside their love for children. On the contrary, their love for children is precisely the reason they hope to maximize their utility in the first place, via Santa Claus.