Christmas: An Economic Inefficiency

I realize that Christmas is over now, but I’ve wanted to address this topic so I am going to do it anyway. I have heard a number of economists (both students and professors) cite and discuss the economic inefficiency of Christmas—particularly of gift-giving. I typically think about this each year at Christmas time, and this Christmas has been no exception; however, this time I did some more thorough reading on the subject and have come to some conclusions of my own.

The groundbreaking article on this topic was entitled The Deadweight Loss of Christmas and was published in 1993 by Joel Waldfogel, an economist that was then teaching at Yale University. The article is an easy read, not too long, and quite interesting. I recommend reading it if you are at all interested.

In economics a deadweight loss is an inefficiency in the economy in which goods or services could be reallocated to make people better off. Christmas gift-giving can be thought of in these terms. Suppose that you want to give a gift to someone and have fifty dollars to spend. In most cases, the most optimal outcome (in terms of utility maximization for the recipient) would be for you to give the money to the recipient and let them spend it themselves. Presumably, they know their own preferences best and would be able to best spend the money to maximize their own utility. If you buy the person a gift instead, odds are that they will not value the gift as highly as what they would have spent the money on themselves. Thus, the gift is inefficient and they are not as well off as they could have been had they simply been given the money.

Dr. Waldfogel researched this effect. He asked a number of people to list the gifts they received, the relationship they have with that person, the cost of the gift, and the recipient’s maximum willingness to pay for the item they received, among other things. He was then able to analyze the data to determine the amount of devaluation that occurs when giving gifts. (For example if you receive a gift that was purchased for fifty dollars and you would only pay twenty five for the same thing then the gift lost 50% of its value.)

The data was analyzed in a number of ways. The results that I found most interesting are as follows:

Giver % Yield % Cash
Aunt, Uncle 64.4 14.3
Sibling 86.2 5.8
Parents 86.5 9.6
Significant Other 91.7 0.0
Grandparent 62.9 42.3
Friend 98.8 6.1
Overall 83.9 11.5

The first column indicates the percentage of the gift’s value that is retained when given; the second is the percentage of gifts in the category that were cash. Thus, we can see that the most efficient gift is from a friend (98.8% yield), then from a significant other (91.7% yield), and so on. On average across all gifts given, gifts only retain 83.9% of their value when given.

Economists look at this and conclude that the economy would be better off (more efficiently allocated) if everyone simply gave cash or if people did not give any gifts and simply spent the money that they would have spent on gifts on themselves. In either of these cases, gift devaluation would be virtually nonexistent and the economy would be better off. The output of an economy is often measured by GDP which uses the final purchase prices of goods as the value of the economy’s output. This is somewhat misleading if the goods are purchased and then on average immediately lose 16.1% of their value by being given as gifts. In this case, the economy (as well as an average individual in the economy) is not really the amount of the increase in GDP better off. Thus GDP is overestimating the health and output of the economy. The level of GDP could legitimately and optimally be achieved, however, if gift-giving was cash only or simply eliminated. Then GDP would then reflect the actual increase in value of goods outputted by the economy.

This perspective has a large amount of validity; however, I think there is an alternative way of looking at it. Gift-giving does have value—both to the giver and to the receiver—although this value is much more difficult to measure. Even knowing that giving a gift will cause devaluation of the gift, people still want to give gifts. In some ways, this is not much different from a shipping cost. Shipping costs on gifts do not directly benefit the giver or the receiver but are necessary costs incurred in order to give a gift to someone that is not nearby. Similarly, gift devaluation is a “gift-giving cost” that the gift-giver (and receiver) gladly pays in order to give a gift. (Although, this is different in some senses, as shipping costs are part of GDP but the “gift-giving cost” is not.)

I believe that in many cases the gift-giver is maximizing utility by purchasing and giving a gift—if they simply gave money or spent the money on themselves they would not be able to achieve the same level of utility. When I think about what I could have purchased for myself with the money that I spent on Christmas I think it would be very difficult—and maybe impossible—for me to be happier spending my money elsewhere. Similarly, the receiver often gets more utility out of receiving a gift than purchasing the same thing for themselves. Even if they would not have purchased the particular item given as a gift themselves, there is still additional utility gained from receiving a gift—whatever it is—from someone you care about.

So what’s the moral of this? Putting time, effort, and thought into giving a gift does count for something—at least 16.1% of the gift’s value on average. If as either a gift giver or receiver we feel like gift-giving is inefficient and that there is a deadweight loss in the gift, then I think we are missing the point of gift-giving and need to reevaluate our perspective and/or the gifts we are giving.