The Inefficiency of Christmas Gifts

A letter to Tim Harford (The Undercover Economist) asks, What’s the best Christmas present?

Your letter obliges me to disinter the influential research of the economist Joel Waldfogel on the “deadweight loss of Christmas”. Fifteen years ago, Waldfogel published an academic article demonstrating that the recipients of gifts would not generally have been willing to pay what it cost to provide the gift. A £30 sweater was valued at £20, for example, creating a “deadweight loss” of £10. Siblings were not the most incompetent givers – that honour goes to aunts and uncles – but they were not especially competent either.

Waldfogel’s work is often misinterpreted as suggesting that gift-giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents. That may explain why the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested. It may also explain why gift vouchers are a bad idea: they have no sentimental value but still create deadweight loss, since many expire without being used, or are sold at a loss on eBay – as the economist Jennifer Pate Offenberg has documented.

All this points to the optimal gift-giving strategy: you need to minimise the deadweight loss while maximising the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together.

If you feel a financial transfer is necessary, slip a cheque into the envelope too.

For a more in-depth look at Waldfogel’s research—and the implications thereof—The Economist takes up the slack.

If the results are generalised, a waste of one dollar in ten represents a huge aggregate loss to society. It suggests that in America, where givers spend $40 billion on Christmas gifts, $4 billion is being lost annually in the process of gift-giving. Add in birthdays, weddings and non-Christian occasions, and the figure would balloon. So should economists advocate an end to gift-giving, or at least press for money to become the gift of choice?