Why Economists Decry the Inefficiency Of Holiday Gift Giving

Economic research shows that most people value gifts received 20% less than things they buy for themselves.

The efficient market response would be to give cash. But - as economists have been trying to explain for years regarding the difference between efficiency and productivity - it's not just about being efficient. So Merry Christmas and embrace those socks, undergarments, belts and sweaters. JL 

Farnam Street reports:

By “inefficiency,” (they) mean the gap between the value to you (very little) of the $120 argyle sweater your aunt gave you, and the value of what you would have bought (an iPad, say) had she given you cash. Applying standard market reasoning, concludes that it would be better to give cash: “Economic theory  and common sense lead us to expect that buying for ourselves will create more satisfaction than does buying stuff for others. We value items we receive as gifts 20% less, per dollar spent, than items we buy for ourselves.” (But alternatively) gift giving is “signaling,” an economist’s term for using markets to overcome “information asymmetries”(such as) choosing a good gift is a signal of love.

Joel Waldfogel, an economist at the University of Pennsylvania (now at Minnesota’s Carlson School of Management), has taken up the economic inefficiency of gift giving as a personal cause. By “inefficiency,” he means the gap between the value to you (maybe very little) of the $120 argyle sweater your aunt gave you for your birthday, and the value of what you would have bought (an iPod, say) had she given you the cash. In 1993, Waldfogel drew attention to the epidemic of squandered utility associated with holiday gift giving in an article called “The Deadweight Loss of Christmas.” He updated and elaborated the theme in a recent book Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays: “The bottom line is that when other people do our shopping, for clothes or music or whatever, it’s pretty unlikely that they’ll choose as well as we would have chosen for ourselves. We can expect their choices, no matter how well intentioned, to miss the mark. Relative to how much satisfaction their expenditures could have given us, their choices destroy value.

Applying standard market reasoning, Waldfogel concludes that it would be better, in most cases, to give cash: “Economic theory—and common sense—lead us to expect that buying stuff for ourselves will create more satisfaction, per euro, dollar, or shekel spent, than does buying stuff for others . . . Buying gifts typically destroys value and can only, in the unlikely best special case, be as good as giving cash.”

Waldfogel’s conclusion:

“We value items we receive as gifts 20 percent less, per dollar spent, than items we buy for ourselves.”

If gift giving is so massively wasteful why does it persist?

It isn’t easy to answer this question within standard economic assumptions. In his economics textbook, Gregory Mankiw tries gamely to do so. He begins by observing that “gift giving is a strange custom” but concludes that it’s generally a bad idea to give your boyfriend or girlfriend cash instead of a birthday present.

But why?

Mankiw’s explanation is that gift giving is a mode of “signaling,” an economist’s term for using markets to overcome “information asymmetries.” So, for example, a firm with a good product buys expensive advertising not only to persuade customers directly but also to “signal” to them that it is confident enough in the quality of its product to undertake a costly advertising campaign. In a similar way, Mankiw suggests, gift giving serves a signaling function. A man contemplating a gift for his girlfriend “has private information that the girlfriend would like to know: Does he really love her? Choosing a good gift for her is a signal of his love.” Since it takes time and effort to look for a gift, choosing an apt one is a way for him “to convey the private information of his love for her.”

Why thoughtfulness matters

“Signaling” love is not the same as expressing it. To speak of signaling wrongly assumes that love is a piece of private information that one party reports to the other. If this were the case, then cash would work as well—the higher the payment, the stronger the signal, and the greater (presumably) the love. But love is not only, or mainly, matter of private information. It is a way of being with and responding to another person. Giving, especially attentive giving, can be an expression of it. On the expressive account, a good gift not only aims to please, in the sense of satisfying the consumer preferences of the recipient. It also engages and connects with the recipient, in a way that reflects a certain intimacy.