The dreaded Christmas shopping period is reaching its peak. Some people have, but last-minute shoppers still need to answer the usual questions: How much to spend, who to give gifts to and, of course, which presents to get them.

Provided that gift-giving aims at making the recipient happy, it might pay to have a look at what economists have to say about gift-giving at Christmas. After all, economics is not about making people rich per se, as often claimed, it’s about making people happy, or in the terms of the discipline, about maximizing utility with given preferences.

Joel Waldfogel (1993) is probably the first to conduct a survey on the efficiency of gift-giving at Christmas. Starting from the popular economic assumption that the consumer knows her own preferences best, he expects gifts that other people get her to be different from what she would get herself for the same budget. More precisely, he expects them to fulfill preferences to a lesser degree and suspects a deadweight loss associated with gift-giving. (Some readers will recognize this reasoning as similar to the arguments against in-kind transfers from the state.)

Furthermore, since the suspected deadweight loss is due to incomplete knowledge of the recipient’s preferences, we would expect close friends and family to give more efficient-gifts, i.e. gifts that are closer to what the recipient prefers. To investigate this hypothesis, Waldfogel asked students from his microeconomics course to list which presents they got last Christmas, from whom, what the approximate price was and how much they valued them. It turned out that the students were already willing to surrender their gifts for 71% of the cash they expected the gifts to cost. Hence, it seems, a viable strategy for gift-giving from an economic point of view might be: (1) Answer: Who do you want to give presents to? (2) Answer: What do you want to get her/him? (3) Determine the price, compute 71%+? and give this amount in cash to the individual from (1). If Waldfogel’s findings are correct, the recipient should prefer this – on average! – to the gift envisaged in (2).

Of course, this strategy should not be taken too seriously. First, Waldfogel himself casts doubt on the reliability of his estimations, because the indifference-fraction increased drastically to 87% in his second survey. Hence, we could criticize the representativeness of the data, which stems solely from students of one course at Yale (Solnick/Hemenway 1996). In Solnick’s survey, which included people from all age groups, more than 50% of respondents said they valued the gifts above their market value. Thus, deadweight loss in their sample was, if existent at all, much smaller. The different findings might be due to the fact that Waldfogel’s economics students knew what he was after and accommodated him in the survey, thus creating an experimenter’s bias. Or it might indeed just be that his sample was unrepresentative, because (a) economists behave differently from students of other disciplines (which has been shown e.g. in the context of cooperation and corruptibility), (b) the general population behaves differently from students (I can vouch for that) or (c) the general population behaves differently from kids of rich parents (which Yale students, on average, are). And even if the estimations were reliable, one might still criticize the omission of goods that cannot be obtained on the market. Those could never be bought for cash. Therefore gifts may be the only way to receive certain services or goods.

In any case, both studies find that people closest to the recipient make the most efficient gifts. This suggests that knowing the preferences of the recipient better can save money for the giver, or create more happiness for the recipient with the same budget. If nothing else, this is the message worth remembering from this research. Applying that knowledge, ask friends of someone you don’t know well to determine the gift and increase gift-giving efficiency.

If, on the other hand, Waldfogel’s paper is interpreted as call for a gift-free Christmas, then it is not overly convincing. One might even challenge the key assumption of this line of reasoning. I remember an instance where I received a book as a gift which I would never, ever had read, let alone bought, without outside influence. In fact, I was disappointed by the gift. But at some point I had time on my hands and since the book was available, I risked a glance. It turned out to be amazing and by now I read the entire series. That wouldn’t have happened without that gift. The truth is: People don’t necessarily know their own preferences best. Sometimes, we don’t even know the things we would prefer if we knew them.

by Christoph Siemroth

References

Solnick, S.J. and Hemenway, D. (1996): “The deadweight loss of Christmas: comment,” The American Economic Review 86(5), pp. 1299-1305

Waldfogel, J. (1993): “The Deadweight Loss of Christmas,” American Economic Review 83(5), pp. 1328-1336.