Sunday, December 17, 2006


I am often accused of being "Scrooge-like" around this time of the year. The most oft-cited reason, and there are a number of candidates, is my affinity for the phrase, "Social Deadweight-Loss of Gift Giving." I am of the opinion that, on average, consumers are the best judges of what makes them happy. When we choose the consumption bundles for others, we will likely do so in a sub-optimal manner. The result is that gift receivers are not as well off as they could be if they had spent the money themselves. How often do you receive gifts that, to put it politely, don't quite hit the mark? Each time that happens, benefits to society are foregone. Someone, namely you, could have been better off had those resources been spent in another fashion.

I am not saying that I'm worse off for receiving the gifts. I enjoy receiving gifts, it's just that I think we could be a little (or a lot) better off if we'd just spend the money on ourselves. "But that isn't the point!" I hear some saying. Well, what is the point? How about "doing something nice for someone else." Ok, but we're all trying to do something nice for each other, aren't we? In the case of a gift exchange, we've both purchased gifts trying to make the other person happy. I'm not convinced that each person will be happier than if they had just spent the money on themselves.

There are even a few academic papers out there exploring the subject. In 1993 Joel Waldfogel published "The Deadweight Loss of Christmas," in the American Economic Review (subscription needed) a survey of undergraduate students at Yale asking them to place a value on the gifts they received. He finds that holiday gift giving destroys between 10 percent and one third of the gift value. In a reply, Sara Solnick and David Hemenway report finding gift receivers value their gifts above and beyond the cost of the items. John List and Jason Shogren find similar results using auctions rather than surveys. However, the focus on the valuation ofthe gifts misses the point, in my opinion. The question is whether these individuals could have done even better had they been allowed to choose their gift among all the equally priced alternatives. Just because I value a $12 corkscrew at $15 does not mean I couldn't have used that $12 to purchase a bottle of wine I'd value even more. I can value the gift more than its purchase price and still have a deadweight loss.

Perhaps gift giving creates benefits because the gift givers know more than our consumers? A recent LA Times article (pointer comes from Economist's View) cites a study concluding that those closest to us actually do worse than strangers in predicting our preferences (and choosing gifts for us). I'm not sure if I entirely believe the results, but they are interesting.

What are some other reasons gift giving may or may not create a social deadweight loss?

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