The economic inefficiency of gift-giving


Economist Joel Waldfogel explains why gift-giving is bad for the economy, and why a charity gift card is the best luxury gift of all.

He goes into more detail in his new book, Scroogenomics, which you can buy somebody for Christmas just to tell Waldfogel where he can stick it. ("In the bank!" he'll say as he heads out with his royalty check.)

Related: Economist Tim Harford writes an advice column called Dear Economist for the Financial Times. But instead of applying economic theory to economic problems, he applies economic theory to personal problems.

As Harford himself explains, "Every advice columnist needs a persona, and for Dear Economist it was blunt, rude, and rather fond of the latest economic research."

Comments (19)
  1. Gabe says:

    Best quote: "one more reason to applaud the use of economic theory in personal problem-solving: it’s less dangerous than using it to run banks."

  2. Sinan Unur says:

    As an economist, I find this kind of discourse boring.

    In terms of maximizing the recipient’s preferences over goods and services, nothing beats cash. If you haven’t noticed, there are costs to giving gift cards.

    However, gift giving provides the giver with satisfaction as well. If a person finds spending time and choosing a specific gift more satisfying than just giving cash but the recipient would prefer cash, the two allocations are not Pareto-comparable and an economist cannot declare one less efficient than the other.

    This stuff matters more in terms of policy, however. It is much more efficient to give direct cash to poor people than money that can only be spent on food, money that can only be spent on rent, money that can only be spent on health etc etc but no one likes to hear that.

    The dead-weight loss of Christmas is exaggerated.

  3. Scott says:

    Cash might work for a socialist policy, but I’d question its value as a gift. People have an ingrained fear of offending the recipient. If the recipient is offended instead of pleased, the money effectively had negative value.

    You have to be careful about this sort of self reporting. People tend to under-value things they already have and over-value things they don’t have. The gifts were probably much closer to the mark.

  4. Mark says:

    Surely the problem with cash is it can be used for anything, and the old concern "they’ll only spend it on booze and fags".  While gift exchange is theoretically reciprocal, most people factor in responsibility, and the need to fall back on "I don’t expect anything back".  Choosing an appropriate item in advance is the best way to protect the value of your gift, while choosing an inappropriate item can devalue it.

    The spectre of inappropriate gifts is why I generally buy myself a Christmas present before anything else, so there’s no way I can be disappointed, giving or receiving.

  5. Charles says:

    Anyone know why Raymond does not post over the weekend? I am sure I have read before that he has most posts pre-prepared so Saturday and Sunday posts would not seem to much of a problem? Or maybe there is another reason?

    I miss not reading something new over the weekend!

  6. Marquess says:

    He probably has a life beside this website.

  7. Sinan Unur says:

    @Mark says:

    Surely the problem with cash is it can be used

    for anything, and the old concern "they’ll

    only spend it on booze and fags".

    That is not a valid concern. First, whether you give someone cash or food stamps, you still increase their capacity to buy booze, drugs and cigarettes. Second, if society regards recipients the recipients of food stamps as idiot addicts, what’s the point of feeding them?

  8. peterchen says:

    This – at least from the short read – only compares the "joy of acquisition". Say, I get €20, I can enjoy the ideas what I can buy for this. Later, in the store (or on the internet), it’s already indistinguishable from the other money.

    A good gift is something the receiver would enjoy and would never buy for himself.

    They joy of a new experience or new thoughts can easily outweight the 20% gain mentioned for cash.

    Also, there is bonding: Holding a cup of tea, remembering the person who gave me that cup some years ago. If that person was a pleasant encounter, chance is, my tea tastes better than yours. Or would you lok at a €5 note and think of all the persons that gave you €5 in the last years?

    But then, lack of scarcity. With shelves full of differently-packaged-but-virtually-identical produce available the same all over the world, with local produce easier to be found online and at your doorstep than where it comes from, good gift giving is hard.

  9. Aaargh! says:

    Holding a cup of tea, remembering the person who gave me that cup some years ago. If that person was a pleasant encounter, chance is, my tea tastes better than yours.

    What physical, measurable effect does the fact that someone gave you that cup have on the actual tea and how does it influence the taste ?

  10. Mark says:

    Sinan: I meant more a mug or personal jewellery than food stamps.  A simple rule of thumb for presents is that it should be something the recipient wouldn’t buy themselves.

  11. Jeroen Mostert says:

    @Aaargh!: it has a physical, measurable effect on your brain, where the tea is tasted and memories are served. As Raymond would say, I can’t believe I had to write that. Do you have pointy ears and green blood, by any chance? :-)

    As for myself, I hate getting cash or vouchers of any kind and I’ve asked friends and colleagues to please stop giving them. Of course I’ll politely accept them from people who don’t know any better, but I don’t enjoy it. I’d rather you gave me something you thought I might enjoy. Even if it turns out you’re terribly misguided and I don’t like it at all, knowing that you spent some time thinking about what to give me already makes it better than a generic wad of cash you feel socially obliged to bestow on me.

    For others I can imagine it’s exactly the other way around; they’d rather be given an opportunity to buy something they like for themselves without having to spend money on it than be subjected to the dubious gift-giving whims of others (possibly having to pretend they like the gifts they’ll have to exchange or trash later). Requiring others to be empathic gift-givers might be seen as disingenuous too.

    IMO, gifts should make the recipient happy, no matter how you go about it. The rest is just dreary social convention, like shriveled lettuce garnishing a dish that would have been fine on its own.

  12. me says:

    Some people will find reasons not to give.  And then someone wrote a book about it to help himself justify it and help others do the same.

    Giving is not about you.  It is about the other person.  

    If you both exchange say a ‘wad of cash’ then then it is a zero sum game and not worth even doing.

    If you give a gift they will remember the gift not what it cost.

    Best present I ever got was a NES.  Now my dad could have given me 150 to get the particular NES I wanted and a game.  I probably would have just bought exactly that.  But I would not have considered it the gift.  I also would not have a wonderful memory.

    Gift giving is about giving good memories and thinking about the other person.

    If I give them a gift card they will quickly forget about it.  I usually reserve gift cards for people that ‘have everything’.  They are impossible to shop for and never know what they want :)

    Yes you are poorer for it and so is the rest of the world (which is debatable).  But it strikes me as applying the ‘broken window fallacy’ in the wrong way.  As nothing is actually destroyed.  Only wealth is redistributed.

  13. Bob says:

    Ah, it’s time for the annual "why you shouldn’t be mad that I didn’t buy you a present" rant.

    This year we’re getting to enjoy hearing it from from the mighty captains of industry who brought us "I never saw that recession coming, but you should trust my understanding of economic principles anyway".

    The thing is, even if we assume that they’re right in their understanding of the inefficiencies of the human bonding ritual known as "giving presents", their obvious failure at educating society by repeating the same arguments year after year does leave me wondering if their understanding of human nature is all its cracked up to be.

  14. Sinan Unur says:

    @peterchen

    But then, lack of scarcity.

    There is never a lack of scarcity. There are always constraints on what one can get which means there is always scarcity.

    Scarcity need not be financial. The ultimate scarce resource is time. Ask BillG.

    @Mark: Please re-read my first post above. What I said is simple: Some economists exaggerate the dead-weight loss of Christmas and gift-giving because it’s cute and it will get them more positive attention than saying "abolish all targeted, specific welfare programs, (e.g. TANF, WIC, Food Stamps, Section 8, rent controls etc none of which actually achieves the outcomes they are supposed to achieve) and use Earned Income Tax Credits to give cash to poor people.

    Welfare policy is where the distinction between in-kind transfers and cash matters.

    Anyone with half a brain understands that you do not give your mother $100 for a holiday. On the other hand, your riding instructor would appreciate the cash much more than $100 on chocolates and mugs. But this is not something to worry about as individuals will figure out what works themselves.

    Where the inefficiency matters is where a third party forcefully takes money from some people and gives it to others (i.e. welfare policy).

    @Raymond Apologies for the long post. Feel free to delete / edit as you see fit.

  15. Aaargh! says:

    it has a physical, measurable effect on your brain, where the tea is tasted and memories are served.

    Not for me it doesn’t. I rarely -if ever- get emotionally attached to items like that.

    As Raymond would say, I can’t believe I had to write that. Do you have pointy ears and green blood, by any chance? :-)

    I do, how did you know ?

    As for gifts: I enjoy giving them more than I do getting gifts. I especially dislike ‘big’ surprises, I’d rather you don’t get me anything. There are a few ‘safe’ things I can always use (e.g. kitchen hardware) but unless you’re one of my close friends who know me well, don’t get anything too surprising, you’re wasting your time and money.

    Gift giving is about giving good memories and thinking about the other person.

    And in order to do that you need to know/understand the other person well enough to pick what they like. Few people know me well enough for that.

  16. Mark says:

    Sinan: but you’re the only person here talking about welfare policy.  From what you’ve said so far, you seem to be the arch type of economist, so I shall simply state that efficient != effective.

    Back to gifts, reciprocity (as with many social customs) is not about maximizing one or the other’s gain independently, or as a sum, but the probability of satisfaction on both sides.  People are naturally superstitious, and do not find a normal distribution rewarding, so dynamics like shared experience and humour overpower financial value.  Hence Raymond’s somewhat wry title to the blog post.

  17. Gabe says:

    Sinan: I did exactly what you proscribe — I gave my mother $100 as a present. She needs a new X, and I can’t possibly guess what sort of X she might like. Furthermore, by waiting until the after-Christmas sales, she can get more X for $100, or she can decide to get an X that costs more than $100 by adding some money of her own. Of course I could have gotten her a token X which she would then have to return, but why put her through the hassle?

  18. Sinan Unur says:

    @Gabe: Please note:

    But this is not something to worry about as

    individuals will figure out what works

    themselves.

    as you demonstrated. I remember being utterly shocked and feeling very uncomfortable with my first Christmas experience in Denmark where members of my host family posted wish lists. I remember having great difficulty coming up with a wish list (i.e. saying I want X and nothing else) and being very uncomfortable with the notion that people already knew what was in the boxes.

    In any case, different cultures deal with these things differently.

    Yes, I am the only one who is talking about welfare policy because economists who get attention by harping on the wastefulness of private individuals’ private gift giving behavior annoy me.

    The real waste happens when third parties give one group gifts using another groups’ resources.

  19. This is why I swear by getting gifts off of wish lists.  If the person says "I want this," and you get it for them, then everyone is maximally happy. And if they give you a wish list with several things on it and you pick one or two, they will also be surprised by your gift.

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