“Father Christmas, give us the money
Don’t mess around with those silly toys”
The Kinks, Father Christmas
At this time of gift giving, it is worth considering whether the exchange of presents is efficient. Well at least to an economist it is! Famously, if only in economic circles, Joel Waldfogel in 1993 suggested gift giving was inefficient because it destroyed about 10 percent to a third of the value of the gift. Think of the aunt or uncle that gave you that wonderful (read terrible) sweater last year. They bought it for $100 and you only think it is worth $60.
Grandparents and aunts and uncles are the worst offenders, destroying one-third of the value of gifts. Friends know you the best, giving you gifts that you value at 99% of what they paid. Parents and siblings give gifts at 86% of your valuation. If you don’t know someone else’s preferences well, you can always give cash. Most people value $100 at 100%!! Alternatively, gift cards work well, but not completely efficiently. About 10% of gift cards go unspent, either lost or given to an establishment you don’t frequent. Overall, Waldfogel suggested the total loss to the economy could be $13 billion when extrapolating the results to the whole economy.
Later research, using a more diversified sample that Waldfogel’s Yale students, found gifts could be value-creating because givers may find gifts that the receiver did not know about, or were not willing to pay for themselves. Also, Waldfogel did not measure the enjoyment givers may have from shopping and watching the recipient open their gift.
Happy holidays to our readers, may gift giving bring you joy as a giver or receiver!