Although that strategy didn’t work out so well for Jerry Seinfeld….
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 likely that many gifts given will not perfectly match the recipients’ preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the giver than if the recipient was given cash and allowed to choose his or her own gift. Because many gifts are mismatched with the preferences of the recipients, the author concludes that holiday gift-giving generates an economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts.
The National Retail Federation estimates that Americans will spend about $328 billion this year on gifts for family members and friends. If the deadweight loss estimates of Professor Waldfogel are accurate, that would mean that between $33 billion and $118 billion of spending on gifts this holiday season will be wasted.
In the Seinfeld episode above, Jerry thinks like an economist and tries to avoid the deadweight loss by giving Elaine a beautifully gift-wrapped package that contains $182 in cash. Watch as Jerry’s economic thinking backfires, suggesting that there might be a cost to giving cash that Waldfogel’s model didn’t consider.