A re-sharing of my post from last year. 2016 has been a rough year for many and the last thing we want to do is make it worse by inefficiently buying gifts. Merry Christmas, y’all!
It’s that time of year again. The rush to buy things for people that you guess you care enough about to trawl the discount shelves. However, don’t fret over finding the “right” gift—economic fundamentals tell us it’s inefficient.
Despite the frenzy of our shopping holidays like Black Friday, consumers end up buying last-minute gifts. According to several reports, around 40 percent of consumers end up shopping for gifts from December 21 to December 24. Many consumers just push it off or claim to be too busy. Some shop because of the great deals from Super Saturday to Christmas Eve.
However, close to 91 percent of consumers have purchased a last-minute gift for the holidays.
This type of behavior should not be very surprising since we act the same way even when our GPA is on the line. Let’s just be open about it—we are procrastinators. Although working under the daunting pressure of a deadline may work for college cramming, it does not work with buying gifts. In general, we suck at buying gifts; even more when time is not on our side.
Deadweight Loss: The Inefficiency of Gift-Giving
We’ve all been there (except for nine percent of us, supposedly)—running around Walmart, looking for that perfect gift, hating every minute of our existence during the search. We do this because giving cash is just so impersonal and blatantly shows a lack of effort. However, now we can use the research of Joel Waldfogel as a justification for just giving cash. By using economic theory, Waldfogel concludes, “between a tenth and a third of the value of holiday gifts are destroyed by gift-giving.” He estimates that in 1992, (this paper was written in 1993) the deadweight loss of holiday gift giving was $4 billion to $13 billion.
The main assumption here is that cash is the most efficient gift because we can put that money toward something that maximizes our utility, or makes us the happiest. In order for a $20 gift to be efficient, it has to be the same gift the recipient would have bought with just $20 in cash. If the gift is not efficient, the difference in value, or utility, between the cash and the gift is the deadweight loss.
Deadweight loss is a by-product of taxes, regulation, and other institutions that distort the efficiency of the market. For example, by not allowing Uber to pick up customers from the airport, the deadweight loss are all those folks that would have preferred to take an Uber instead of a taxi.
In the particular market of gift giving, the institution itself is imperfect. Since measuring the recipient’s preferences are almost impossible (without an exact wish list), they would be better off with the cash the giver spent on the gift to put it to something that makes them happier, or that maximizes their utility.
Grandma’s Ugly Sweater Gift
Ever received a gift and said, “Won’t you just look at this?” For example, take the cliché-inefficient gift—the ugly sweater. Fashion trends from long ago are still quite hip to Grandma. Therefore, she sends this Great-Depression-looking sweater to keep us warm during finals.
It makes sense, though. Why would our grandparents be in touch with our specific material desires if we only call them bi-weekly for five-to-ten minutes? How could they possibly know our expected utility? Ironically enough, so much deadweight loss has come from ugly sweaters that it’s become quite the holiday party scene. However, even with this new market for ugly sweaters, you cannot just get anyone any ugly sweater; it has to be the right one.
Significant Others Don’t Exchange The Gift, But Cash Still Wins
The inefficiency of gift giving isn’t beholden to just grandparents. Parents, extended family, significant others, siblings, and friends all add to the deadweight loss of this market. However, the smaller the social distance between the giver and the recipient, the less deadweight loss there is. In an economic experiment, Waldfogel finds,
“Aunt/uncle and grandparent gifts are most likely to be exchanged, at rates of 20.8 percent and 13.3 percent, respectively. Ten percent of non-cash parent gifts are exchanged, as are between 6 and 7 percent of siblings and friends. None of the gifts from significant others were exchanged.”
These findings, not only show that giving cash is the best way to go, but it also shows that you can use economics to model almost anything. So, as you come to the realization that Christmas is just a few days away and you begin drowning in self-loathing for having not started your gift buying, take a load off! The perfect, most efficient gift is just one trip to the ATM.
#FMBA and Merry Christmas.
Posted at GenFKD.