Just like anything good in life, Christmas has been declared inefficient by economists. A study by Joel Waldfogel comes to the conclusion that Christmas is horribly economically inefficient. How does the author come to make such a claim? In gift giving, there are two important values: the cash value paid by the giver for the gift, and the cash value valued by the receiver for the gift. Far from being a trivial difference, the author estimates that somewhere between 10-33% of the value paid for a gift is lost when given to the recipient. In other words, up to a third of gift consumption is deadweight loss because it is paid for but never consumed. This comes from a lack of information between the giver and recipient on how much the recipient will value certain gifts. If I gave you a 20 dollar shirt that you would have paid only 13 dollars for, 7 dollars of economic inefficiency occurred. Had I given you cash instead there would have been no deadweight loss.
Blasphemy, you might say. Christmas is more about the monetary benefits! This is very true. And there is definitely some rationality included in Christmas giving. There are seven reasons, according to the authors, why we continue to make such inefficient transfers instead of just giving cash:
- Paternalism: The giver wants to decide what the recipient consumes. I’d rather give you a Radiohead CD even if you would rather have a Goo Goo Dolls CD. Similarly, I’d rather give a guy on the street a sandwich rather than money.
- Emotional benefits: I can get joy out of giving you a gift. If this benefit exceeds the deadweight loss of the exchange, the exchange is no longer economically inefficient.
- The search costs for the giver are lower than for the recipient. If someone really wants a spoon with the St Andrews logo on it, I’ll probably get it for them because it’s less accessible to them.
- To signal closeness: a gift can enforce an inside joke or something of that sort.
- To signal search effort: rather than giving cash, a gift shows search effort that can increase the recipient’s utility.
- Stigma of cash: society has made it bad to give cash as a gift. (So they invented gift cards, which somehow get around this stigma).
- Sentimentality: every time you wear that pair of socks I got for you, you think of me.
So next time you buy your Christmas presents, think about how much you’re hurting the economy.
Note: The author of the study focused on Christmas as the pinnacle of gift-giving events but in reality the same arguments can be applied to Chanukah, Festivus, Kwanzaa, Casmir Paulaski Day, or any other gift-giving holiday.