As anyone who has ever been disappointed by what they found under the wrapping paper knows, gift-giving can lead to the misallocation of resources. Gift givers misanticipate the value a particular thing will have for the recipient, and thus devote more resources to the purchase than the recipient would. Joel Waldfogel, writing in The American Economic Review back in 1993 discussed this and other related economic issues in a notorious article called “The Deadweight Loss of Christmas.” (Available through JSTOR and Google Scholar)
Imperfect knowledge and non-ideal choices
The paper includes the gloomy conclusion that “gift giving destroys between 10 percent and a third of the value of gifts.” On this basis, the paper estimates that the deadweight loss of holiday giving in the United States in 1992 was between $4 billion and $13 billion. The article does note one possible saving grace: when recipients are ill informed about the existence of things they might enjoy, a gift can be worth more than a transfer of the equivalent quantity of cash. Of course, providing the cash and the information would achieve the same effect, without the risk that the choice will be different from what the recipient would have done with the money themself.
Gifts from friends and significant others are most efficient (largely because they know the preferences of the recipient best), while “noncash gifts from members of the extended family” are most likely to be valued by the recipient at less than their cost of purchase. Recipients value gifts from friends at 98.8% of their actual value, while those from significant others are valued at 91.7%. Parents and siblings give gifts worth 85% of their cost, while aunts and uncles manage only 64.4% and 62.9%, respectively. These conclusions were reached largely on the basis of surveys given to Yale undergraduates (favourite targets for psychological and economic experiments). Waldfogel notes that a social stigma can exist against giving cash gifts, but it is weakest where aunts, uncles, and grandparents are concerned – not coincidentally, the least effective choosers of gifts.
The thought counts
I have a more wide-ranging response of my own. Thankfully, there is a phenomena that partially offsets imperfect gift choice losses: the extent to which the very status of something as a gift increases its value in the eyes of the recipient. I can think of scores of cases where a product or service that would not have been particularly gratifying if purchased for myself was especially welcome and meaningful when received from someone else. In many cases, this creates utility significantly greater than that which could be achieved through personal spending of an equivalent sum.
I was reminded of all this when I saw Waldgofel’s article mentioned on Marginal Revolution, an interesting economics blog.