Taking the Loss out of Deadweight Loss

In a previous post, I comment on the deadweight loss of gift giving. Now there is this article in the New York Times on unused gift cards. It seems that Consumer Reports estimates nearly 19 percent of last year's gift cards will go unused because of loss or expiration. Marginal Revolution notes that when gift cards go unused there is no deadweight loss, "just a pure transfer to some shareholders."

I've never understood the idea of the gift card. Everyone knows how much you spent on the card (no chance of over-valuing the gift) and you are placing constraints on how the receiver may use the money. Again, it seems that the only situation in which this gift would be better than cash is when you know better than the receiver that they need to spend $100 at Best Buy.

Supermarkets and gas stations have close to 100 percent redemption rates, said Bob Skiba, who runs the gift card division of Ceridian Corp.'s Comdata gift card division, based in Louisville, Ky.

''You don't have to buy a sweater every day, but you do have to eat and fill up your car,'' Skiba said.

This is especially interesting when paired with the recent article in the LA Times noting that we tend to buy useful gifts for those closest to us. Even though a useful gift "seems to contradict the entire purpose of holiday giving."

Is the useful gift the optimal gift? Why do we tend to love to receive the overly extravagant/useless gift? Is it a signal of how wealthy the giver is? "I can afford to spend this much money on you, gee ain't I great"?