In 1993 Joel Waldfogel published a paper “The Deadweight Loss of Christmas” in which he declared that the tradition of gift-giving causes economic losses for society because recipients generally value the items they receive as gifts less than the price that was paid by the givers. The source of this inefficiency is caused by the fact that the buyer is not the final consumer of a good and thus there may be a mismatch between the giver’s and the receiver’s preferences. Waldfogel’s study showed that gifts from friends and other people very close to the recipient are more efficient (because friends know the recipients preferences better), and gifts from extended family are the least efficient. He estimated that out of a total $38 billion worth of Christmas holiday gift expenditures the economic loss varied from between $4 to $13 billion. This result attracted attention and commentary from the wider academic community.
Here I want to present my modest view related to the issue.
Economists have the temptation to explain every phenomenon within models in terms of rational decisions made by homines economici. We sometimes forget that people are homines sapientes. The value of gifts is not only in the price paid for them. Things have values which are emotional as well as material. During the process of gift giving some value added is created that can be referred as sentimental value. What is the value of flowers you receive from a loved one? Not merely the price paid for them, that is for sure. Whenever you look at them you remember that person, make associations with them and this gives you a positive feeling. The sentimental value of gifts was excluded from Waldfogel’s study. In his study, the respondents (who were students enrolled in an intermediate microeconomics class – an additional aspect which has to be taken into account) were instructed to estimate the value of a gift as the “… amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift”.
The custom of gift-giving is a topic of interest not only in economics, but also in anthropology, philosophy, sociology, and psychology. All of these fields have come to the consensus that historically, gift-giving had a primarily economic function. It performed two different purposes: gift-giving was a signal of wealth and of the seriousness of intent between two groups attempting to cooperate and establish good social or trade connections. In addition, gifts sometimes worked as a form of insurance against hunger, with a group with surplus helping another with the implicit knowledge that they would be repaid at some future point. Yet as society has developed, the economic functions of gifts have weakened. Reasons may be the strengthening of the rule of law, the decreased dependency on social ties, and more independence and improved living conditions. Occasions for gift-giving nowadays are limited to such events as birthdays, Christmas, specific holidays and marriages. Personally, I remember how we used to receive a lot of gifts from relatives, and not only when I was a child during Soviet times, 20-25 years ago. I think gifts were more common those days, maybe because we did not have free access to things and connections mattered a lot; people were trying to improve their connections and foster cooperation. I believe most gifts we received back then were of a reciprocal nature. Things have changed now, gifts are losing the economic rationale of reciprocity, but the feelings associated with gifts still remain. I believe that regardless of any deadweight loss, the tradition of gift-giving will continue to exist, but the number of gifts given will decrease and will be limited to those given by close people. So even we, economists, will continue to give presents to our loved ones, regardless of any “economic inefficiency” associated with them.
References:
Bradley J. Ruffle. 1999. “Gift giving with emotions”. Journal of Economic Behavior & Organization. Vol. 39.
Bradley, J. Ruffle, and Tykocinski, Orit. 2000. “The Deadweight Loss of Christmas: Comment”.The American Economic Review, Vol. 90, No. 1.
Solnick, J. Sara and Hemenway, David. 1996. “The Deadweight Loss of Christmas: Comment”.
The American Economic Review, Vol. 86, No. 5.
Waldfogel, Joel. 1993. “The Deadweight Loss of Christmas”. American Economic Review. December, Vol.83, No 5.
Comments
Of course, we will. Happiness of our loved ones is in our utility function and we will want to see them happy, no matter 20% more or less
Thank you Maka for your nice post. Ending it with a happy comment is also appreciated.
Notwithstanding, as a human being first, and an advanced one (i.e., economist), I cannot agree more with Waldfogel: while I might disagree with the methodology or the exact numerical outcomes, his idea is brilliant, and I think it has some truth to it.
For the sake of your "more humanly" (rather than economic) approach let's focus merely on the "human" aspect of the issue. From my experience--and here I speak about the Arab and Jewish traditions that which I lived through and witnessed first-hand--gifts (mainly wedding gifts) are for the most part a huge economic (and psychological/social) burden if not loss.
Not only because the preferences of the giver and receiver are not aligned (which is true for the in-kind gifts that Waldfogel supposedly refers to), but because people perceive the gift as a debt that you have to repay. The big "mismatch" here is not the value of the gift (because these are cash gifts anyway), but the "debt" being unsolicited. On the other hand, once the receiver has the money he will spend it on whatever urgent needs there are at the time being (and in wedding time there are many such needs). When time comes to repay, this slightly comes with "interest," since you never give back the very same nominal amount, but rather a greater or equivalent real amount: and given that the time span between receiving and repaying the 'gift' is long, the excess burden is huge.
Now, bottom line is this: people perceive other's wedding (that they have to attend and to give 'gifts' or repay the 'gifts' that they received earlier) as a burden. Not as a "feeling" or "emotions" getting into the utility function, etc... not at all. They perceive other's weddings (or occasions where gifts are required, and socially expected/demanded) as "maturity date," to use the exact economic term for their feelings and actions in this regard.
Finally, if you follow my argument closely, you'll see I'm against "socially expected/demanded" gifts--these that are invited by certain predictable life events: weddings, funerals in some societies, maybe birthdays, etc... In these occasions you feel the coercion and you almost never give the gift because you "chose to," or "love to," or feel anything about it. On the other hand, spontaneous (out of the blue) gifts, which are really due to pure intentions and feelings, such as for a friend, a colleague, or a relative, will always be sweet, dear, and appreciated--regardless of their money value; indeed, cheaper and simpler gifts are at times much more appreciated and valued (e.g., flowers-pocket, kid's doll or gadget, etc...). Especially when they are given NOT at a special occasion--in other words, when they are NOT predicted, and NOT expected. In these cases, given the low price of the gift and the great appreciation that comes with it, there is indeed a great welfare/social SURPLUS, rather than a deadweight loss.
A very interesting point, Muhammad (last paragraph)! I understand that the wedding gift tradition in Israel is now to cut checks. This helps reduce the deadweight losses but, still, checks (unless very large) come with little thought and appreciation. They are expected and that's it. So let's start surprising each other with flowers, instead!!!
Dear Muhammad,
Thank you for your comment. You touched very interesting point of “socially expected/demanded” vs “spontaneous” nature of gifts. As I remember, none of above mentioned studies have addressed this issue. I think such kind of division would make results more clear.