The ‘deadweight loss of Christmas’

by Grace

If you’re still trying to find last-minute Christmas gifts, maybe you should relax and consider that there is a sound economic reason to give cash.  Gift-giving creates what economist Joel Waldfogel called the “deadweight loss of Christmas”, which is the monetary loss that arises from people making bad gift choices for other people.

In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given. Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift. In reality, it’s highly certain that many gifts given will not perfectly match the recipient’s own preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the gift-giver than if the recipient was given cash and allowed to choose his or her own gift. Because many Christmas gifts are mismatched with the preferences of the recipients, Waldfogel concludes that holiday gift-giving generates a significant economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts purchased.

Gift cards may be cutting into the deadweight loss.

The real drag on the economy then isn’t gifts; it’s bad gifts. And Mr. Waldfogel cheers the rise of the gift card as a substitute for the bad gift: Something you can buy your niece or grandson when you have no idea what they actually like.

“What’s interesting about gift cards is that they are a lot like cash but have emerged as a way to give the choice to the recipient without the ickiness of cash,” he says. In other words, the deadweight loss problem he identified in 1993 may be on the wane because of a technological advance.

On the other hand, it is estimated that between 10 to 30 percent of gift cards are never used.

What’s not mentioned is the pleasure experienced from giving and receiving presents.  It’s hard to put a price on that, and we should remember that it’s the thought that counts!

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Mark J. Perry, “Holiday shopping? Consider the most economically efficient gift of all: cash, and avoid the deadweight loss of Christmas”, Carpe Diem, December 17, 2014.

Josh Barro, “An Economist Goes Christmas Shopping”, New York Times, December 19, 2014.
DEC. 19, 2014.

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