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). 😀