What Can Be Done About the Inefficiencies of Giving Gifts?

The economist Joel Waldfogel introduced the idea that the holidays brings deadweight loss. How can waste be minimized when it comes to gift-giving?

It's the day after Christmas, or what the Commonwealth calls Boxing Day. Children in Commonwealth countries wait a whole extra day to open their presents (which makes me suspect that they might have an advantage in the Stanford marshmallow experiment). It's also a big shopping day, much like Black Friday in the U.S. Stores put everything on sale and those who didn't get what they asked for go in to make exchanges and returns.

Economists will inevitably talk about the deadweight loss of Christmas gift giving around the holidays. The scrooge who came up with the term, economist Joel Waldfogel, literally wrote the book on the subject. Deadweight loss is the mismatch between what a gift giver thinks a receiver wants and what the receiver actually wants. This, in Waldfogel's words, "is just the waste that arises from people making choices for other people. Normally I’ll only buy myself something that costs $50 if it’s worth at least $50 to me. When I go out and spend $50 on you though, because I don’t know what you like and what you need, I could spend $50 and buy something that would be worth nothing to you."

Expanding this concept to the whole economy, a conservative estimate of deadweight loss is 10 percent (that is, the average gift receiver values a gift at 90 percent of its actual value). Given that Americans are expected to spend about $600 billion on holiday gifts this year, that would put the amount of deadweight loss at $60 billion.

What are the proposed solutions for reducing this loss? The easiest is the Chinese answer: cold hard cash in an envelope. But that doesn't work in cultures that haven't established a tradition to exchange cash—it feels too practical and lacking in holiday spirit. Moreover, because it's the gift giver that reaps much of the benefit of "thoughtful" gift giving, cash would take away from the buyer's side of the equation.

This year, two economists published a paper challenging some conventional economic beliefs about Christmas. They argue that firstly, because Christmas is expected for 11 months of the year and stores compete hard with each other for customers during the holiday shopping season—prices for gifts and food won't go up due to scarcity. In fact, they might go down. Waldfogel has suggested gift cards as a solution that's cash-like but not icky, but as it turns out—gift cards also suffer from deadweight loss, about 10 percent. And with unredeemed gift cards adding up to an estimated $1 billion annually—that might result in another kind of loss. Gift cards are surely inferior to money in an economist's eyes, but new digital gift cards (like GiftRocket) is basically sending money digitally while reducing the "ickiness" Waldfogel describes.

So maybe it's just best to be selfish at Christmas: Give a gift if it makes you feel good, and abstain if it doesn't. Either way, there's some kind of economic gain and loss. Did you get a gift this year you didn't like? Go ahead and return it or exchange it for something you do like—you'll be reducing deadweight loss. And those gift cards you got from that economist friend? Remember to use them.