Economists Put Coal in Your Stocking
Though it's been nearly a decade since The Economist published this piece, I can't help but think of it every year at this time -- especially when the fruit cakes start arriving (not a reference to any members of my immediate family). It turns out that, from an economic perspective, Christmas gift-giving is deeply inefficient:
Much of the holiday spending is on gifts for others. At the simplest level, giving gifts involves the giver thinking of something that the recipient would like—he tries to guess her preferences, as economists say—and then buying the gift and delivering it. Yet this guessing of preferences is no mean feat; indeed, it is often done badly. Every year, ties go unworn and books unread. And even if a gift is enjoyed, it may not be what the recipient would have bought had they spent the money themselves.
Intrigued by this mismatch between wants and gifts, in 1993 Joel Waldfogel, then an economist at Yale University, sought to estimate the disparity in dollar terms. In a paper* that has proved seminal in the literature on the issue, he asked students two questions at the end of a holiday season: first, estimate the total amount paid (by the givers) for all the holiday gifts you received; second, apart from the sentimental value of the items, if you did not have them, how much would you be willing to pay to get them? His results were gloomy: on average, a gift was valued by the recipient well below the price paid by the giver.
The most conservative estimate put the average receiver's valuation at 90% of the buying price. The missing 10% is what economists call a deadweight loss: a waste of resources that could be averted without making anyone worse off. In other words, if the giver gave the cash value of the purchase instead of the gift itself, the recipient could then buy what she really wants, and be better off for no extra cost.
Perhaps not surprisingly, the most efficient gifts (those with the smallest deadweight loss) were those from close friends and relations, while non-cash gifts from extended family were the least efficient. As the age difference between giver and recipient grew, so did the inefficiency. All of which suggests what many grandparents know: when buying gifts for someone with largely unknown preferences, the best present is one that is totally flexible (cash) or very flexible (gift vouchers).
If the results are generalised, a waste of one dollar in ten represents a huge aggregate loss to society. It suggests that in America, where givers spend $40 billion on Christmas gifts, $4 billion is being lost annually in the process of gift-giving.
Parents, take note. If your child asks for nothing more than a bag of cash this year, you should start looking at colleges with strong economics departments. To be safe, you might also want the name of a good bail bondsman too.
- Comment (4)
- · Quote
- · UnfollowFollow (1)
Comments :
May '10
Re: Economists Put Coal in Your Stocking
It seems the big caveat is "apart from sentimental value." One would hope--well, at least I do--that people take that into account heavily. While I might not have bought a specific item for myself, I appreciate the effort and affection of the person who gave it to me and use or wear the item with that gratitude in mind. And sure it would be more appreciated, especially by the family teenagers, if I gave them cash or a gift card or the electronic gadget they specifically asked for in the appalling list they email in late November, but I don't see gift giving as that kind of exchange. It isn't about economics, but about affection, and I got enjoyment out of the buying or making of the gift and hope it's accepted in that spirit. And yes, it hurt when the scarf I knitted showed up in my husband's niece's garage sale (in our yard no less!), but it was nonetheless made and given with affection. The next year, I made something that took a lot less time, though!
Oct '10
Re: Economists Put Coal in Your Stocking
This post made me smile - and not just because of the clever bail bondsman remark. On all gift-giving occasions I find myself pondering the same inefficiency. It's not Pareto, Santa!
My solution is to always give something which could re-order the recipient's preferences to resemble mine. If you're old enough to read, that means you're getting a book. At the end of the day, at least I'm happy.
Jul '10
Re: Economists Put Coal in Your Stocking
Yes. But gift giving is a victimless crime.
Jun '10
Re: Economists Put Coal in Your Stocking
Maybe Michelle Obama needs to straighten out this abominable injustice, too. You can't rely on the parents to figure it out, after all.