My informant was visiting a friend in New Orleans during Mardi Gras when she encountered this tradition.
They were having dinner, when her friend’s mother brought out a very ornate, colorful bunt like cake, with frosting in colors of green, yellow, and purple, the colors of Mardi Gras. Mardi Gras, which means fat tuesday, is the big celebration, known for illustrious partying, before the season of Lent.
The cake, she was told, is called a king cake. It is called this because it symbolizes a gift given to Baby Jesus during the Epiphany by the three kings. Inside the cake is a baby figurine, representing baby Jesus.
The custom is that whoever gets the slice of cake with a small, plastic baby figurine inside, will have to supply the next king cake or host the next Mardi Gras party. Apparently the king cake is seen at parties and dinners for about a month, until Lent begins.
My informant is Catholic and celebrates the Epiphany as well, but had never heard of anything like a King cake. Her friend told her it was pretty particular to the southern States who celebrate Mardi Gras.
Mardi Gras is notorious for being a very over the top, gaudy celebration. This is probably why the cake is so colorful and ornate, reflecting the festive season. The use of a baby figurine is quite interesting, as one encounters it through eating the cake. It sounds like some mother who was tired of hosting parties and supplying all the food came up with this ploy to pass along the responsibilities of being a host!