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The Economics of Gift-Giving

It’s exactly two weeks from Christmas…the stress is real to find the perfect gift for your loved ones.  I mean, how do you know exactly what they want or need?  Will it be one of those presents that will gather dust on one of the shelves, or will it be something they will truly enjoy?  Some economists, contend that the chances that your loved ones will actually like the present may be fairly low.  Wait…what?  Are economists actually advocating the ideals of the Grinch and Mr. Scrooge? Let’s examine further.

In 1993, economist, Joel Waldfogel wrote a paper called the The Deadweight Loss of Christmas and, in more recent years, wrote a book called Scroogeconomics:Why You Shouldn’t Buy Presents for the HolidaysAccording to Waldfogel, there is a fundamental gap between the present one person receives and the next best alternative.  For example, you receive a book valued at $20.  The problem is that you have already read the book and that leaves you thinking, if I could get a winter hat for the same $20 that was paid for the book, that would give you more satisfaction and happiness, or in economic terms, utility. This gap creates what economists call as deadweight loss, an inefficiency caused when supply and demand do not match.  What’s causing this inefficiency is called “Asymmetric Information,” which basically means that there is unequal or disproportionate information held by one of the parties, in this case, the recipient of the gift.  The giver doesn’t exactly know what the recipient wants and, in effect, is “guessing.”  Waldfogel even went on to estimate the amount of this deadweight loss is around $12 billion in 2007 dollars.  

According to Waldfogel, there are additional costs that cause these inefficiencies as well ,such as time spent shopping, wrapping presents, etc.  So what does  Waldfogel suggest to eliminate this deadweight loss of Christmas?  Give Cash!  With cash, anyone can buy exactly what they want or need and we get rid of the deadweight loss! Cash is King, right?

Whoa…hang on!  Before we prove that the Grinch is correct after all.  Maybe we should also look at the flip side of why giving gifts, especially during Christmas isn’t too bad.

Waldfogel suggests that asymmetric information causes the reduced satisfaction (utility) of the gift recipient hence leading to an overall deadweight loss.  The relationship seems rather linear and one-directional i.e. from giver to recipient.  But in practice, is the relationship really linear? Or is it bidirectional, maybe even a virtuous cycle?  What if there is also satisfaction or utility to be gained from the giver’s end as well by the mere fact of giving? Elizabeth Dunn and Michael Norton contend that there is in fact some virtue in giving and satisfaction, even happiness from the act of giving itself. Their study showed that “prosocial” spending reported a greater level of happiness while spending on oneself showed almost no change in happiness at all.  While this may be difficult to quantify in dollar terms, would it be safe to say that some of the happiness gained from giving may offset some, if not all of the deadweight losses?

Economist Greg Mankiw contends that giving gifts is actually a way for a person to signal their love for another.  A man’s act of planning, picking out the gift as opposed to giving his girlfriend cash shows her that he invested enough time and effort to shop for a gift, in the hopes that it pleases her.  This emotional investment is something that cannot usually be quantified monetarily but increases utility for the couple’s relationship as well.

We have also heard the saying: “It’s the thought that counts.”  According to the University of Washington’s political economist, Anthony Gill, it’s all about the process of giving and graciously receiving that makes society a better place.  “No society can exist without trust, generosity, and reciprocity,” says Gill.  Giving involves sacrifice, ritual, visibility and reciprocity which promote trade and prosperity.  He contends that the best way to build a strong market economy is to be generous and gracious. 

So if you’re feeling a little Grinch-like or Scrooge-y this Christmas, think about how you would potentially feel if you were in the position of giving.  And don’t stress too much on whether you think the present will be appreciated by the recipient.  As Professor Gill eloquently shared in this poem below…good manners are good economics!

Happy Holidays from Average Joe’s Economics, and I will see you all in 2024!

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