Tag Archives: gifts

The Deadweight Loss of Gift Vouchers

Of the $92 billion spent on gift vouchers in the U.S. last year, $6 billion was lost to fees and unused cards. In response to this, the U.S. Credit Card Act now bans fees on vouchers that have been dormant for less than 12 months and expiration dates of less than five years from the date of purchase.

The problem is, according to research on how we use vouchers, this is the opposite of what’s needed to prevent an increase in the deadweight loss of gift vouchers.

Ryan Sager explains:

While these are intended as pro-consumer reforms, they’re based on a misunderstanding of the real problem with gift cards: You lose money on them not primarily because of fees or expiration dates, but because you throw them in a drawer and forget about them. Or, you lose them, or you hold on to them indefinitely — always thinking you’ll redeem them tomorrow.

It’s counterintuitive, but the way to make people more likely to redeem their gift cards would be to shorten the time before they expired.

Sager points to two studies that corroborate this assumption: one indirectly, showing that city residents are less likely to see ‘the sights’ of that city than tourists with limited time; and another directly, conducted on students with obviously twisted priorities:

64 undergraduates [were given] coupons for a slice of cake and a beverage at a local French pastry shop. Half got a certificate that expired in three weeks, half got one that expired in two months. While students were sure they were more likely to use the certificate with the more generous timeframe, the results were clear: The shorter timeframe made the students much more likely to redeem their certificates; 10 of the 32 students (31%) redeemed the three-week certificates, only two of the 32 students (6%) redeemed the two-month certificates.

Long-time readers may recall Joel Waldfogel’s research on the inefficiencies of Christmas gift-giving: a deadweight loss of 10%, resulting in a $4 billion loss to the US economy every year.

In that article, Tim Harford suggested small and sentimental gifts as ideal, warning against gift vouchers as “they have no sentimental value but still create deadweight loss, since many expire without being used, or are sold at a loss”.

You have been warned.

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?