Carpe Diem

Holiday shopping? Consider the most economically efficient gift of all: cash, and avoid the deadweight loss of Christmas

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 certain that many gifts given will not perfectly match the recipients’ own preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the gift-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 a significant economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts purchased.

The National Retail Federation estimates that Americans will spend $602 billion this year during the holiday season. If the deadweight loss estimates of Professor Waldfogel are accurate, that would mean that between $60 billion and $200 billion of the 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 his close friend Elaine a beautifully gift-wrapped package that contains $182 in cash. Watch as Jerry’s economic thinking about giving cash backfires, suggesting that there might be a cost to giving cash as a gift that Professor Waldfogel’s model didn’t consider.

46 thoughts on “Holiday shopping? Consider the most economically efficient gift of all: cash, and avoid the deadweight loss of Christmas

  1. I should read the study. Usually these studies leave out things. Like if I need a sweater, and my wife buys it for me. It may not have the same value as if I bought it myself from a utilitarian point of view. Lets say I get 90%.

    But I do gain, one tangeble benefit and on intangible which may make the gift more valuable than the 100% price.

    First my wife spent the TIME to shop for me. I didn’t have to trudge around at Marshalls looking for the damb sweater and waste an hour. An hour of my time is about $50 – so add that. There is also gas and wear and tear on my car …

    Less tangeble, is the gift lets me know my wife appreciates me. It is hard to place a value on affection, but to know she still loves me adds to the value as well.

    So even though it may win an ugly sweater contest, I would still wear it, know I am appreciated, and glad I didn’t have to run around Marshalls.

    Eh? Is that all accounted for?

    • > An hour of my time is about $50 – so add that.

      An appropriate gift shows you’ve been thinking about the person, and that you understand what wasn’t verbalized. It’s not about economically benefiting the receiver.

      Also, research into animal courtship shows that worthless items make the best gifts. For example, among birds that normally don’t value pebbles at all, pebbles are used as courtship gifts.

      • “First my wife spent the TIME to shop for me. I didn’t have to trudge around at Marshalls looking for the damb sweater and waste an hour. An hour of my time is about $50 – so add that. There is also gas and wear and tear on my car …”

        you may be leaving something out.

        did she not drive and/or is her time not worth somehting?

        i can see how you would value not having to go, but isn’t this just cost shifting (to her) not cost removal?

        i suspect she would value not having to go as well.

        • Yes it does, but it makes the gift more valueable to me.

          Say it is a $100 sweater – and I only value the sweater at $90 , but then add in the time that it is worth to me, and I have a $100 sweater that is worth $140 to me, plus her love.

          You says you can’t give of your time, as well as your wealth?

          It may have been a slightly poor example because wifes and husbands frequently draw from the same pool.

        • Actually my adoring wife considers serving me to be the highest and best possible use of her time, so no, she wouldn’t value not having the privilege of shopping for my present.

          Oh sh*t! Here she comes! Where’s that “boss” key?

    • In this scenario, you all forgot the unspoken value gained. when wearing said sweater that female purchased, brownie points are earned. Its basically like gold, unless she deflates the value for un-specified reasons.

  2. My husband and I have a policy of not giving each other gifts for holidays and birthdays. We hate the pressure of having to go out and root around for some piece of junk to present on a particular day. Christmas is my nightmare.

    I’d give money (and I give money to my service providers), but as hitssquad points out, this misses the point for friends and family. I prefer to run across an item I know someone will love or to discover that the person is coveting something, buy it for them and give it to them as soon as possible.

    • my family does much the same thing.

      we give small gifts and try not to make a big deal out of it.

      personally, i like to give consumables: nice wine, good whiskey, good foods or chocolate or single origin coffee.

      easy to give and people will actually use it.

          • are you saying you married someone who does not like wine and or bacon?

            you seemed so sensible.

            (granted, the muslim world is clearly in the no wine and bacon camp, but then, i think we can trace many of the problems there to sublimation of these fundamental human drives… :-p i get grumpy too when deprived of those fundaments of human existence.)

      • Learning about cash and money in general would certainly be a great present for children at Christmas or any other time. As a life-long saver, I am always amazed at people who think they can continually spend more than they make.

        As far as quantifying gift-giving, there might be some things you want to keep to yourself unless you want to quantify the anguish that would probably cancel out any economic advantage you hope to achieve.

        • Walt: “Learning about cash and money in general would certainly be a great present for children at Christmas or any other time. ”

          I agree, Walt.

          A lady interviewed this week on Fox News pointed out that a fixed allowance for a child provides more education than a system of task-based rewards. With the former, the child should learn that immediate gratification has consequences. The child might learn how to plan ahead. But the woman did emphasize that children should be expected to do chores in order to support the family which was providing them food and shelter.

          • John

            A lady interviewed this week on Fox News pointed out that a fixed allowance for a child provides more education than a system of task-based rewards.

            In my own experience (whatever that’s worth) I have found that a fixed allowance works better for children 6-8 years old, and the pay for performance plan, perhaps in combination with a fixed allowance, seems to work better for older kids, who can better appreciate that production must proceed consumption. Both hopefully teach the lesson that choices have consequences, although it isn’t always apparent that that lesson is EVER learned, as many adults seem to have missed it.

    • Actually there are complaints about the size of cash. In Europe and Candada different denomination notes have different sizes so it is easy for blind and hard of seeing people to distinguish the notes. In the USA all bills are the same size, making it more difficult.

      So money isn’t necessarily the right size!

  3. Benefit: No deadweight loss – economical gift giving.
    Cost: loss of friends and loved ones.

    Assessment: If you’re happy dying alone, by all means – give cash as a gift.

  4. I have given both cash/gift cards and items as gifts as i suspect most of us have. What this does not measure is the satisfaction the giver gets when they get the item right and the joy clearly shows on the receiver’s face. It is almost impossible to put a monetary value on the smile your child or spouse has when they open a thoughtful and well selected gift.

    Granted you don’t always get it right, but sometimes you do and the reward it pretty good. You just don’t get that from cash.

    • Gift cards are pretty bad. I have a person who likes to get gift cards, but chooses places I don’t like to frequent. It took me three years to find and REI and then actually go to it.

      The Best buy Card was worse. I went in wanting a camera, and they didn’t have what I really wanted, and what they had was 20% from Amazon. So I ended up getting a camera I didn’t want and feeling ripped off about it as well.

      Oh and the Camera stopped working just about right when the return policy ended. Grrr. Cash instead of gift cards always, unless you know 100% for certain it is a place where the person likes to shop.

      • speaking of gift cards and “markets in everything.” If there are places you like to frequent and would like to get gift cards at a discount or sell gift cards you don’t want – Visit cardpool dot com, or plasticjungle dot com.

        It is especially nice if you want to do a decent sized project from say Home Depot (and you think their services and prices are worth it) you can order $3000 of gift cards to pay for it from one of those services and get about 8% off. It will pay for taxes anyway.

  5. Of course if you go online shopping is much faster than in person, also you don’t have to find a parking space, and the items appear at your door in a few days. Sort of eliminates the difference between the big city and the rural areas in what can be shopped for.

  6. I don’t think those economists understand the basic concept of value. I wonder what their analysis of society’s use of color would be.

  7. You also need to consider the benefits of netting. Instead of exchanging cash gifts, why not create a spreadsheet for family and friends, ask everybody for their intended gift amount, and then just transfer the net balance. Economizes on transaction costs, in addition to avoiding the deadweight loss.
    Merry Christmas to all economists!

      • Taken to its logical, and obvious, conclusion, all participants in such a cash gift exchange should agree to a fixed amount for the gifts. Thus everyone’s net gift amount would be $0 and would thus totally eliminate transaction costs.

        Ho, ho, ho.

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