Gifts – Value adding or a loss

Giving gifts, whether it is to family members during the holiday season, to friends on their birthdays or to a loved one as a sign of affection, is a long standing and well-loved tradition. But is there another aspect of this habit that we fail to take into account? Perhaps something that might concern a business or economics student when considering the nature of gift-giving? A paper(1) published in 1993 in the American Economic Review suggests that during Christmas a sizeable part of these gifts’ value is lost due to different personal preferences, which then results in a deadweight loss for the economy as a whole. We could then conclude that gifts in general have a negative effect on the economy. But does this mean that we should stop the tradition of gift-giving for the sake of preserving economic value?

In order to tentatively answer this question, we must first turn to the information provided by Joel Waldfogel’s seminal 1993 paper. Based on surveys to undergraduate students at Yale University, Waldfogel estimated that the difference between the price paid for the gift and price that the recipient would be willing to pay for said gift varies negatively between 10-30%. He explained this variance by showing that cash-based gifts or those from close family and friends tend to maintain their value, while those received from more distant acquaintances or work colleagues lose the most.
Indeed it might not seem like the discrepancy in value is of much importance, after all it is said that the thought behind the gift matters more than the item itself. But Waldfogel’s data would indicate otherwise. He calculated average Holiday spending in 1993 to be around $40bn in the United States. Taking into account the earlier calculations, a conservative estimate would imply a deadweight loss of value of at least $4bn, which is a considerable amount by any criteria. What’s more, this estimate reflects a market from 23 years ago, and it is no secret that consumer spending has been on an upward trend ever since. As recently as 2013 statistics(2) put the number of seasonal retail sales in the U.S. somewhere upward of $3.19tn, orders of magnitude larger than what Waldfogel estimated.

But in spite of this negative evidence, there are numerous reasons to embrace gift-giving, beyond its apparent economic flaws.
Firstly, people’s preferences cannot be considered to be hard rules as they are easily subject to change. After all, often by receiving a gift of, for example, a new and fascinating book we become interested in its genre or author. This unstable nature of what people like and dislike would suggest that many gifts carry value that is not immediately apparent and that might have been overlooked in the Waldfogel’s study.
Continuing on this theme we should take into the sentimental value of the gift being received. Of course the cost of the item has a bearing on its value, but it is arguable that even more value stems from variables such as circumstances in which we received the gift or who we got it from. A childhood photo album might be almost worthless to everyone except the family that it belongs to, and we would not judge its value based on its paper quality. Similarly, a red rose is really only special to the person that it was destined for. These arguments would suggest that there is more to gifts than meets the eye, and that it is this human element that surpasses the drawbacks of macroeconomic loss.

In summary, although a world of perfect gift-giving has the possibility of satisfying everyone, it leaves out much of what we love about the tradition. Efficiency would surely surge if each person received ideal gifts from everyone else, but that is hardly compatible with our nature. So perhaps the best course of action is to embrace our tradition and keep on giving gifts, even if our friends might not appreciate the 4th pair of Christmas socks they’re getting.

Vlad Tașcă

30-01-2017

(1)Waldfogel, J. „The Deadweight Loss of Christmas”, American Economic Review, December 1993, vol. 83, no. 5.
(2)https://www.statista.com/topics/991/us-christmas-season/