The Deadweight Loss of Christmas Gifts

It’s that time of year again. The rush to buy Christmas gifts is here. However, let’s not fret over finding the right gift—economics tells us it’s inefficient.

Procrastinate Much?

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. Aside from being busy, shopping under the wire can be a result of not knowing what the recipient likes, forgetting, and having to reciprocate the receiving of an unexpected gift before Christmas turns into a pumpkin.

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 near deadline may work for virtually any class in college, 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—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 behind this paper 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 gift, worth $20, 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 is all those folks that would have preferred to take an Uber instead of a taxi.   

In this 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

Do you recall ever receiving a gift and say, “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 college.

It makes sense though. Why would our grandparents be in touch to our specific desires for material things 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 closer 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 Day is just a few days away and that feeling of drowning in self-regret for not having gotten anyone a gift yet rushes through your body, take a load off! The perfect, most efficient, gift is just one trip to the ATM.

Merry Christmas!

 

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