Cash Gives the Recipient More Bang for His Buck

from Mark J. Perry:

It’s that time of year for my annual post on the “deadweight loss of Christmas gift giving.”

1. Economist Steven Landsburg writing in his book the “Armchair Economist: Economics and Everyday Experience“:

I am not sure why people give each other store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.

2. In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given. Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift. In reality, it’s highly certain that many gifts given will not perfectly match the recipient’s own preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the gift-giver than if the recipient was given cash and allowed to choose his or her own gift. Because many Christmas gifts are mismatched with the preferences of the recipients, Waldfogel concludes that holiday gift-giving generates a significant economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts purchased.

3. The National Retail Federation estimates that Americans will spend $630.5 billion this year during the 2015 holiday season. If the deadweight loss estimates of Professor Waldfogel are accurate (one-tenth to one-third of total spending), that would mean that between $63.5 billion and $210 billion of the spending on gifts this holiday season will be wasted.

4. In the Seinfeld episode above, Jerry thinks like an economist and tries to avoid the deadweight loss by giving his close friend Elaine a beautifully gift-wrapped package that contains $182 in cash for her birthday. Watch as Jerry’s economic thinking about giving cash backfires, suggesting that there might be a cost to giving cash as a gift that Professor Waldfogel’s model didn’t consider.

Happy Holidays!

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