Waldfogel’s unwanted gift

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Can conventional economic theory be extended to understanding Christmas gifts? Maybe it can, but this would require a more subtle understanding of human behavour than the idea of rational economic man. This article shows that we do not simply value gifts in terms of the cost of the purchase.

You will not be receiving Christmas presents from me this year. Instead I am sending you a copy of the American Economic Review for 1993. It contains a fine article by Professor Joel Waldfogel entitled The Deadweight Loss of Christmas.

Professor Waldfogel’s argument is simple. Suppose I give you a tie that cost me $50. It is unlikely that you would have bought exactly that tie if you had found a $50 note on the pavement,. The difference in value between what I bought and what you would have done with the money is a measure of the inefficiency of gift giving – the deadweight loss of Christmas.

The American Economic Review encourages its contributors to support their analysis with data. Professor Waldfogel meets this requirement. A survey of 86 gift recipients found that they would have been willing to pay an average of $313 (£216) for the Christmas gifts they received. But the ungrateful interviewees estimated the total cost of these gifts to the donors at $438. Another sample would have been willing to sell their Christmas presents for an average of $462. This group estimated the average expenditure by donors at $509. Presents from aunts, uncles and grandparents were particularly inefficient. On average they were worth less than two-thirds of their cost. Gifts from friends and close family members did somewhat better.

Applying these results to the overall incidence of gift-giving in the United States Professor Waldfogel estimated that the total loss to the American economy attributable to Christmas 1992 alone was between $4 billion and $13 billion. Nor is that all. In the interest of political correctness, Professor Waldfogel reminds us that references to the deadweight loss of Christmas should be understood to apply equally to Hanukkah and other holidays with gift-giving rituals.

Professor Waldfogel’s opus is in a tradition of pursuing the concept of rational economic man to dotty extremes.

There are two ways of reacting to it. One is to take the view that there are certain areas of life which are off limits to economists. The assumption that people act as selfish maximisers may be helpful in explaining how business works but there are very large areas of social activity – such as Christmas – that need to be analysed in different ways. There is not – and there cannot be – any economics of beauty goodness and truth.

But there is something unsatisfactory about a framework of analysis that imposes a dichotomy between the values of the business world and those of everyday life. It is humanly very difficult to be a beast in the board room and a saint at home. The expectation that one set of attitudes will inevitably corrode the other is the basis of much popular distaste for business, and provides a powerful rationale for an insistence that business values be kept away from nurturing activities such as education and healthcare. Christmas at the Waldfogels, when each member of the family gives the other $50 so that they can buy exactly what they would have spent $50 on themselves, would be an impoverished affair.

Better to look for explanations of human behaviour that are comprehensive. Gifts are part of business life as well as social life. We give because it is conventional, and because it gives us pleasure both to give and to receive.

Why is it conventional to exchange gifts, and why do we take pleasure in it? A gift is a demonstration of our commitment to a relationship. That is why it is unusual, but not unknown, for us to make gifts to strangers. Generous people may wish to make their commitment to the society in which they live. But most feel the strongest commitment to individual members with whom they are acquainted. The pleasure we take in the exchange of gifts is in the affirmation or reaffirmation of these commitments. Such pleasure is usually enough to override Professor Waldfogel’s inefficiency: i.e. the knowledge that we will never actually be able to wear the tie we unwrap on Christmas morning.

The connection between the gift and the relationship means that the gift should be appropriate. Too small a gift demeans the value we place on the relationship. Too large a gift appears to impose an obligation greater than the other party wishes to accept. The best gifts are those which reflect some intimate knowledge and demonstrate the special nature of the relationship. That may be the reason that Professor Waldfogel found that friends gave more efficient gifts than uncles and aunts.

There are still a few shopping days left before Christmas. Perhaps I will put down my copy of the American Economic Review and go to Harrods after all.

The Deadweight Loss of Christmas by J. Waldfogel, American Economic Review. Vol. 83, No. 5 December, 1993.

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