Not so jolly: the economics of gift giving

2007-09-19

in Daily updates, Economics, Geek stuff

Victoria Island, Ottawa

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.

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{ 26 comments… read them below or add one }

Milan September 19, 2007 at 2:30 pm

One gift I definitely do not recommend buying anybody: a $9000 bus journey from London, England to Syndey, Australia. It takes 12 weeks and involves passing through 20 countries.

Litty September 19, 2007 at 7:13 pm

It is also entirely possible that cash gifts will be spent on things that yield utility in the short term (tequila shots?) but not much of value over the long term.

Sarah September 20, 2007 at 5:07 pm

I have long opined that the purpose of gifts is to provide luxury items that somebody wouldn’t purchase for themself (eg. silk scarves, champagne truffles, cashmere-lined leather gloves). As such, you might receive a $30 pair of gloves that you wouldn’t have bought for $30, but it wouldn’t follow that you didn’t *value* the gloves at $30 – it might simply be that you couldn’t afford to spend $30 on gloves, or were worried that buying youself luxurious-but-slightly-impractical gloves would send you down the slippery slope to a life of dandyism, unbridled hedomism and bankruptcy. My aunts, luckily, provide just the sort of luxuriant gifts mentionned above: indeed the silk scarf (purple and gold, very imperial) and cashmere-lined leather gloves were part of last year’s Christmas haul. Obviously there is an issue about the luxuriant gifts being appropriately chosen, but one could assume that silk, cashmere, and chocolate truffles are widely acceptable.

Tom September 20, 2007 at 6:09 pm

The “slippery slope to a life of dandyism, unbridled hedo[n]ism and bankruptcy” sounds like fun.

Tristan Laing September 21, 2007 at 8:58 am

I think this kind of cost-benefit rationalization is precisely what gift giving is not about. Gifts, if they are truly gifts and not some complex form of trade, are given with no thought of a “return”, even if return simply means the enjoyment the other person gets from it. Of course the determination for gift giving is the enjoyment of the gift by the other, but this is not it’s cause in a sense that can be teleologically evaluated after the fact.

The distinction between the determination of an action and the “fore the sake of which” of an action is so subtle that contemporary moral philosophers bungle it all the time.

Anon September 21, 2007 at 9:38 am

gifts and not some complex form of trade, are given with no thought of a “return”, even if return simply means the enjoyment the other person gets from it

Firstly, it seems wrong to say that all gifts are given for the same reason. ‘Scheduled’ gifts – Valentine’s Day, anniversaries, etc – are largely the product of social and societal expectations.

Secondly, it would seem that giving someone a gift that they value is precisely the objective of most gift-giving. While some people may be willing to pay 5X for a gift the recipient only values at X, that doesn’t seem likely to be a common circumstance.

. October 16, 2009 at 5:38 pm

Q & A: Scroogenomics Author on the Holidays’ ‘Orgy of Wealth Destruction’

Mr. Waldfogel estimates that Americans drop close to $70 billion a year on Christmas shopping for gifts people often don’t want … baggy underwear, ugly sweaters, etc. Society, he says in the book, would be better off if people didn’t spend it.

“Throughout the year, we shop meticulously for ourselves, looking at scores of items before choosing those that warrant spending our own money. The process at Christmas, by contrast, has givers shooting in the dark about what you like… to make matters worse, we do much of this spending with credit, going into hock using money we don’t yet have to buy things that recipients don’t really want.”

He says the deadweight loss to society from all of this frivolous spending — an “orgy of wealth destruction” as he calls it — is about $25 billion. Imagine if that money was given to charity instead? Or how many banks it could have saved! (If it were used to pay down the government’s debt, we might get the whole thing paid off in just a few centuries!)

Milan October 16, 2009 at 5:44 pm

Gifts, if they are truly gifts and not some complex form of trade, are given with no thought of a “return”, even if return simply means the enjoyment the other person gets from it.

Hardly any gifts of this type are actually given. A very rough guess might be 10%.

I think most gifts are given out of social obligation for birthdays, Christmas, Valentine’s Day, etc.

Most gifts also probably cost more than the recipient would have paid for them, demonstrating the deadweight loss mentioned above.

Tris October 17, 2009 at 12:26 am

There is something else ignored in the “economics of gift giving” as described above: what is actually given in a gift is not the object at all. Rather, the content of a gift is the action of gifting itself, and the value of that action is not merely a product of the worth of the object and the appropriateness of that object to the person in question. When an object is received as a gift it does not merely stand alongside all an individuals other objects as possessions valued in relation to the extent to which their consumption is desired. Rather, it remains an instantiation of the thought of the gift given, a symbol of the importance of the gift-given in the gift-recipients life.

Tris October 17, 2009 at 1:13 am

I don’t think the “deadweight” loss of gift giving at Christmas can be taken as a serious expression of wealth destruction. Sure, much wealth is destroyed, but this is part of Christmas. We value gift giving, which in culture means valueing having-other-people-buy-you-what-you-don’t-want. We value the loss of wealth that corresponds with the Christmas gift giving bonanza at it’s exact amount – otherwise we’d choose the opportunity cost. (Paying down the debt? I doubt it.)

The obvious retort is to say that individuals are not rational actors, or not in this case. But actually how can you prove this in this model? It’s an assumption – and if you make it, you can easily explain all the behavior – including the continued practice of buying the wrong presents (this is a cultural practice which is valued at it’s opportunity cost, just like we might say that going to Church is valued at the cost of doing something more enjoyable on Sunday morning). You could assume that individuals are rational actors only some of the time, and then define all the times they make choices you disagree with as irrational actions. It seems that’s what is happening in this argument about “mis” allocation.

Milan October 18, 2009 at 7:37 pm

It seems sensible to consider the issue of poorly chosen gifts.

For instance, I think ‘re-gifting’ should be more culturally acceptable. If I get something nice, but which doesn’t suit me, it is better for all concerned if I can give it to someone who will appreciate it more, without offending the original giver.

Milan October 18, 2009 at 7:38 pm

The argument made here that uncashed gift cards should go to charity is also convincing.

Tris October 19, 2009 at 1:58 am

“For instance, I think ‘re-gifting’ should be more culturally acceptable.”

I agree. However, since re-gifting could hurt the feelings of the original gifter, for re-gifting to become a cultural value we would also have to value frankness and honesty in the reception of gifts.

I think in terms of individual action the best course is to withdraw or reduce one’s involvement in pervasive gifting (replacing gifts with cash or donations to charity is a straightforward way to do this), and put the amount of thought into gifts that the authentic practice of gifting deserves.

Milan October 19, 2009 at 8:41 am

That is almost exactly what the author of both the academic article mentioned in the post and the interview posted later as a comment is calling for.

. December 8, 2009 at 4:13 pm

You Shouldn’t Have
The economic argument for never giving another gift.
By Joel Waldfogel
Posted Tuesday, Dec. 8, 2009, at 7:04 AM ET

With just three weeks till Christmas, the Red Bull-infused phase of the holiday shopping season is upon us. If recent history is any guide, the month of December alone—with just 8 percent of the year’s shopping days—will bring 23 percent of the year’s sales at jewelry stores, 16 percent at department stores, and 15 percent at electronics stores. U.S. December retail sales can be expected to exceed sales in other months by $65 billion. Finally, some good news for the economy. Or maybe not.

Normally—during the 11 non-December months of the year—I’ll spend $50 on something only if it’s worth at least $50 to me. Typically, measures of spending provide a lower-bound on the value of the satisfaction that buyers expect to reap from their purchases. While some of our own purchases ultimately disappoint, we generally buy well for ourselves, so using spending as a barometer of consumer satisfaction makes sense. Spending on gifts is different. When I set out to spend $50 on you, I operate at a significant disadvantage. I’m not certain about what you have or what you want, so when I spend $50 on a gift, I may buy something worth nothing to you. There’s no guarantee that consumer satisfaction meets, exceeds, or even comes close to the amount spent on the gift.

How much satisfaction do we purchase with the $65 billion worth of stuff we put under the tree? Over the past 15 years, I’ve done a lot of surveys asking gift recipients about the items they’ve received: Who bought it? What did the buyer pay? What’s the most you would have been willing to pay for it? Based on these surveys, I’ve concluded that we value items we receive as gifts 20 percent less, per dollar spent, than items we buy for ourselves. Given the $65 billion in U.S. holiday spending per year, that means we get $13 billion less in satisfaction than we would receive if we spent that money the usual way—carefully, on ourselves. Americans celebrate the holidays with an orgy of value destruction. Worldwide, the waste is almost twice as large.

. December 15, 2009 at 4:20 pm

Currently, awesome artist/Ph.D.-holder Jorge Cham is offering a peer-reviewed, Christmas-themed reading list, for your vacation enjoyment. Suggested papers include:

* Christmas Disease: A condition previously mistaken for haemophilia. British Medical Journal, December 27, 1952

* Red Crabs in the Rainforest, Christmas Island: Biotic Resistance to Invasion by an Exotic Snail. Nordic Society Oikos, 1991

* More Than a Labor of Love: Gender Roles and Christmas Gift Shopping. Journal of Consumer Research, 1990

. November 10, 2010 at 4:19 pm

“Thanks to the inventors at Amazon.com, you needn’t fear Aunt Martha any longer. On Tuesday, Amazon CEO Jeff Bezos received a patent for a bad gift defense system that intercepts gifts you don’t want and instead sends you something that you actually do want. For example, Amazon explains that its ‘System and Method for Converting Gifts’ would allow you to set up a rule like ‘Convert all gifts from Aunt Mildred,’ which would automatically convert any online gift orders from your well-meaning-but-tasteless Auntie into a gift certificate. Other examples of how the system might be used: You could convert bad gifts to something off your wish list; block specific products (‘Not another XYZ comic strip calendar’); or ensure that any clothing gifts match your exact size (‘Check clothes sizes first’).”

. December 4, 2010 at 9:56 pm

The economics profession’s pre-eminent gift-basher is Joel Waldfogel of the University of Minnesota’s Carlson School of Management. Waldfogel is the author of the 2009 book Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. According to Waldfogel, gifts on average “generate 20 percent less satisfaction than items we buy for ourselves.” The “deadweight loss” increases in inverse proportion to acquaintanceship because the less well you know the recipient the more likely it is you’ll guess wrong about what he or she might possibly want. (The absolute worst givers, according to Waldfogel, are in-laws, a finding long supported by my own field research.) Another important factor is the recipient’s grasp of his or her own preferences. The surer the recipient is of what he or she wants, the less likely the giver can improve on a straight-up gift of cash. The ideal gift-giving situation is one in which the giver knows precisely what the recipient would like while the recipient (who clearly needs to see a shrink) has not the remotest idea. The lesson would appear to be that you are likeliest to create value (or at least not destroy it) if you restrict gift-giving to your husband, wife, children, parents, lover, and best friend.
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The catch is that only in our most intimate relationships will an ill-considered gift risk inflicting serious emotional damage, which imposes a different type of cost. Give your mailman a Hershey bar for Christmas and the worst he’ll likely do is shrug. Give your wife a Hershey bar for Christmas and she may file for divorce. Increasing the gift’s value won’t necessarily keep you out of the penalty box. If Jim gives Della $100 in cash, she may file for divorce even though he’s thoughtfully eliminated any risk of deadweight loss. Harvard economist Greg Mankiw explains this dynamic using “signaling” theory. When Jim chooses a gift for Della, he signals that he spent time on it and utilized “private information” about Della. If Jim chose well, that will tell Della he loves her because it shows “he is thinking about her all the time.” If Jim chose poorly, that will tell Della he doesn’t love her because it shows he isn’t thinking about her very much at all. Parental relationships are intimate, too, but the same calculus doesn’t apply because a parent’s love for a son or daughter is usually less open to doubt. Jim is less likely to offend Jimmy Jr. if he writes him a $100 check for Christmas, because Jimmy Jr. probably doesn’t spend much time worrying that some other young man will displace him in his father’s affections. (Literary caveat: In “The Gift of the Magi” Jim and Della are a childless couple with nothing like $100 to blow on Christmas presents.)

In general, men appear (unsurprisingly) to be less generous gift-givers than women; they get away with it only because their wives and girlfriends don’t know (or don’t want to). Margaret Rucker, a cultural studies professor at the University of California-Davis, surveyed couples about how much their partners spent on a gift. She found that the woman consistently overestimated what the man spent while the man consistently underestimated what the woman spent. (Indeed, in O. Henry’s story we learn that Della spent $21 on Jim’s watch fob, but we never find out how much Jim spent on Della’s combs.) Such asymmetry suggests that even if you ignore gift-giving’s strong likelihood to create deadweight loss, it contributes to the existing wealth inequality between men and women. Such inequality is economically inefficient not only because women are likelier than men to be raising children but also because women increasingly outperform men in the labor market.

Byron Smith December 7, 2010 at 10:06 pm

Why wouldn’t you recommend the 12 week bus journey from London to Sydney? Once I’ve finished my PhD here in Edinburgh, we are likely to go back to Sydney and rather than a 24 hour flight,* a three month trip like that would be one very interesting way to get back. You’d want the bus to be comfortable!

*(There is still one short flight from Indonesia to Australia, and possibly one or two more depending on the political stability of various Asian nations).

Milan December 7, 2010 at 10:15 pm

Obviously, my view of long bus journeys has changed a bit since September 2007.

Now, that trip sounds like quite an adventure.

Byron Smith December 8, 2010 at 10:31 am

Fair enough. Not sure we’d actually do it with a small child, but it sounds exciting. Maybe we’ll catch a boat back home instead.

Tristan December 9, 2010 at 3:31 pm

Is it possible to take a boat from London to Sydney? That sounds like quite the 19th century adventure.

Byron Smith December 9, 2010 at 5:02 pm

Well, really an 18thC adventure originally! (New South Wales was founded as a British colony by the First Fleet in 1788)

I actually have no idea, but it is something my wife and I have semi-jokingly discussed from time to time. I’ll look into it one day.

. August 28, 2011 at 2:52 pm
. December 21, 2013 at 9:59 pm

IT WAS a big week for Wang Wei. On a recent Wednesday she had two weddings to attend, then on Saturday, two funerals. Each involved a banquet, and by custom she was obliged to bring cash gifts. That was no hardship a decade ago, when the going rate for four banquets was the equivalent of $5-10. And a decade before that, she would have just brought rice or corn from the family plot.

It is a hardship now. The cost of gift-giving in rural China has gone up much faster than incomes. This week Ms Wang’s outlays added up to 350 yuan, or close to $60—about a month’s income. A pleasant, open-faced woman of 41, she says it is money she could have used to buy basic appliances. A water heater would be nice, she says, so her husband, in-laws and two teenage children wouldn’t have to boil water to bathe. A fridge would be splendid. But these are extravagances. Giving gifts for big occasions is an inescapable, and increasingly onerous, obligation for hundreds of millions of China’s farmers.

Much attention has been paid recently to gift-giving in urban China. In the past year the Communist Party under Xi Jinping has cracked down on excessive official banqueting. Such unseemly displays of consumption are well-known opportunities for bribery. But the banqueting culture in rural and small-town China is a more vexing problem. If officials’ lavish parties are a symbol of social inequality, they are not a significant cause of it. The gift-giving practices of everyday weddings (such as the one pictured above), funerals and milestone birthdays are doing much more to deepen actual inequality.

The burden imposed by renqing is a painfully public one, since the giving is done publicly. At a typical banquet guests line up to give cash at a reception table, where someone records the amount and the name of the guest in the family’s gift ledger. No matter how little you earn, you are expected to give the prevailing amount. And if your guanxi with the host is close, you must give more, regardless of income.

. December 17, 2017 at 3:04 am

First, don’t be a soulless utilitarian. Most of my fellow economists fall into this category, many even advocating we simply give one another cash for the holidays. A variant on this is to give very practical gifts, such as household appliances at the high end, or tube socks on the low end.

The fundamental error here is not economic efficiency per se, but excessive usefulness. The best gifts are, in fact, useless. By this I don’t mean worthless, but rather, valuable for the intrinsic satisfaction they bring as opposed to being a means to some other end. While economists are busy ruining their marriages with cash and blenders, marketing experts have long found that people get the most satisfaction from “useless” experiences that have emotional impact, like going on a beautiful bike ride. Researchers believe this is especially true for older people, who derive much more pleasure from experiences than possessions.

Third, no matter how terrible your gift, wrap it up nicely… As it happens, the appeal of well-wrapped, worthless gifts is nearly universal, and even goes beyond Homo sapiens. Early this year in the journal BMC Evolutionary Biology, researchers showed that some male spiders — Paratrechalea ornata, to arachnologists; “fuzzy brown ones” to the rest of us — give food gifts to prospective mates that are nutritionally worthless but wrapped ornately in the silk produced by their bodies. Imagine giving your beloved a chicken nugget meticulously wrapped in beautiful fabric, and you get the idea. Apparently for spiders, as for humans, it’s the wrapping that counts, because the worthlessness of the gift inside did not affect the receptivity of the female.

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