25.12.09

Merry Christmas!

As an expression of the festive holiday spirit, while being mindful of the current economy, I direct you to a timeless economics paper on The Deadweight Loss of Christmas by Joel Waldfogel.

Put simply, when it comes to gift-giving, the only person who knows precisely the value of a potential gift is its receiver. If the receiver values the gift at less than the value the giver expended to acquire it, we have deadweight loss: economic inefficiency present when allocation of goods is not Pareto optimal (that is, some other allocation would leave both parties better off). Had the giver instead given that same value in a more fungible form (the epitome of which is generally reached in cash), the receiver could have acquired the value present in the intended gift and the value present in the excess, thus maximizing his utility from the gift value. Where does that lost value in the excess go, if the inefficient gift is given? It is lost; neither giver nor receiver is fully satisfied. The giver overallocated his resources toward satisfying the receiver (or, if you prefer, allocated them in a way which did not maximize received value); the receiver’s utility was not maximized.

So, in the future (perhaps not this Christmas, but in future ones, or for birthdays, or for other times when you might ordinarily give presents), do your friends’ utility curves and your pocketbook a favor: give the gift of cash, the gift that will give them exactly what they want. (And, if you still think you know what your friends want better than they do, simply suggest the ways you think they would best maximize their utility while spending it. Another idea: give early to maximize net present value of the money, also allowing them to take advantage of fleeting sales that may no longer be available after Christmas or some other occasion.) You will increase the market efficiency of a baroque, inefficient ritual, and you will improve the economy in the most efficient manner while doing so.

Update: One comment directs me to today’s Dilbert strip, which expresses the above rather more pithily (particularly noting that gift-giving inefficiency is likely heightened for workplace gifts where deep knowledge of the other person’s desires is potentially less common). :-D

12 Comments »

  1. […] Jeff Walden linked to a great paper:The Deadweight Loss of Christmas by Joel Waldfogel. Given the economy this several year old paper is extremely relevant and interesting. Something to keep in mind when merchants report their holiday sales statistics. […]

    Pingback by Christmas Economics | Robert Accettura's Fun With Wordage — 25.12.09 @ 15:23

  2. So you give me $50 and I give you $50 in exchange? That sounds like so much fun ;-)
    I take it you haven’t seen todays Dilbert: http://dilbert.com/fast/2009-12-25/

    There are always some variables we haven’t thought of.

    Comment by Kadir — 25.12.09 @ 17:32

  3. If you want to show affection, I think there are better ways to do it than just guessing they’ll like something you decide to buy them. It’s sad that people now associate gift-giving with showing affection so strongly, even though it’s a horribly inefficient way of achieving that goal.

    I hadn’t seen the Dilbert strip, it’s great. :-)

    Comment by Jeff — 25.12.09 @ 21:14

  4. The analysis largely lacking from the economists’ point of view is (unsurprisingly) the sociologists’ one, namely that it is generally considered rude (or more charitably, “impersonal”), even if inefficient, to give, say, gift certificates or cash as gifts.

    Doing so has a number of sociological implications (which may or may not actually exist), all of which are generally negative: “The giver doesn’t want to put in effort into figuring out what I would like,” “The giver values our relationship to be worth exactly this much currency at this point in time,” or “The giver didn’t feel it worth their time and effort to work out something easier than a withdrawal from their bank account,” (cf. the Dilbert cartoon.)

    So while it may be efficient, we generally don’t do it: there’s a social taboo that, to use an economic term, provides a “barrier to entry” that turns out to be pretty costly.

    But I’m sure it all sounded good at an economics symposium.

    Comment by Preed — 26.12.09 @ 01:44

  5. This whole reasoning rests on a postulate, or maybe a set of postulates, which are, I think, not necessarily true, namely, that utility can be measured on a one-dimensional scale, and that making a gift of cash has no less utility to the receiver (pleasures him/her no less) than giving him whatever (s)he would most like to acquire at that price. In my experience, receiving some well-chosen gift can be much more fun than receiving the price of that gift; and the utility to both giver and recipient can be enormously higher in the case of a well-chosen gift which cannot be obtained through trade, such as a singleton gift (as a mathematician might say), handicrafted by the giver in person.

    Comment by Tony Mechelynck — 26.12.09 @ 08:27

  6. Nonsense. The concept of value is not merely limited to the monetary worth of the gift; it includes the thought and effort undertaken by the giver, and it includes the receiver’s appreciation of that worth, too. Talking of a single “value” concept is merely a useful shorthand.

    Comment by Jeff — 26.12.09 @ 11:15

  7. A useful shorthand, maybe; but it assumes that an unambiguous “liking” value can be assigned to any gift, and validly equated to a monetary value; it is this assumption which I challenge, and so do (with different wording) the authors of comments #2, 3 and 4. I believe that the assumption that “I necessarily like receiving the monetary price of X as much as or more than I like receiving X itself” is a fallacy.

    Comment by Tony Mechelynck — 26.12.09 @ 15:16

  8. P.S. Maybe I didn’t notice the irony in the original post, and swallowed the bait (how does one say in English) hook, line and sinker. Or maybe I didn’t express my thoughts the best way. Yet I do speak English fluently — for someone whose native language is French ;-).

    Comment by Tony Mechelynck — 26.12.09 @ 15:21

  9. I would rephrase your “fallacy” as “I necessarily like receiving a gift I value at X, plus associated exogenous value Y, no more than I like receiving the identical value X plus Y as money”, making it no longer a fallacy. It may simply happen for some, however, that assuming the giver can identify that particular gift, the corresponding Y may be prohibitively large. Some people have a knack for doing this, especially given some identities of the receiver. Many others, perhaps most others, do not, and for them a simple cash transfer with a suggestion makes far more sense.

    There was no irony in the original post, although I admit the chance to troll a bit may have played a role at the margin, maybe even decisively causing the actual post to be made rather than merely contemplated. :-)

    Comment by Jeff — 26.12.09 @ 22:16

  10. Once Christmas is about economics and cash for someone, then (sh)he should just cancel it and forget about it. Or radically change it and only give love, only give presents that cannot be expressed in monetary value at all.

    All the giving of Christmas is not about value, it is about appreciation and love – if that dies, the whole sense of celebrating Christmas dies with it.

    Comment by Robert Kaiser — 01.01.10 @ 07:32

  11. Sounds good to me, Robert! Although, I think you meant what you said more narrowly as “the whole sense of celebrating Christmas by gift giving”. The argument is for the value of Christmas not being in gift-giving, not for it having none at all.

    Comment by Jeff — 03.01.10 @ 16:46

  12. […] notice, I’m really sorry, but this magazine just isn’t for me: it’s complete deadweight loss. How about in the future we go do something fun together, mutually agreed upon, instead?) Comments […]

    Pingback by Where's Walden? » Dear Automobile magazine — 06.08.10 @ 00:12

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