Christmas and the Destruction of Value

December 25, 2009
Posted by Jay Livingston

What was in those boxes we unwrapped and opened today? Gifts, most people would say.

But according to a Grinch-famous 1993 economics article by Joel Waldfogel, those boxes were also crammed with “deadweight loss” – the difference between what the giver paid for the book or bauble and what it was actually worth to the recipient.

Waldfogel surveyed Yale undergrads and concluded that “between a tenth and a third of the value of holiday gifts is destroyed by gift-giving.” Destroyed. That $40 sweater you gave to your cousin’s husband – you destroyed $10 of its value.

Here’s the key question Waldfogel put to his Yalies about gifts they’d received: “If you did not have them, how much would you be willing to pay to obtain them?”*

By this method, a really good gift would mean a high deadweight loss. For example, I would never pay more than $40 for a sweater for myself. No sweater to me is worth more than that. But suppose a good friend bought me a really, really nice $200 sweater. I love that sweater. I love it precisely because it’s an extravagance I never would have allowed myself. But the most I’d be willing to pay for it is $40. So according to Waldfogel, my friend destroyed $160 (80%) of the sweater’s value.

When I first heard about the Waldfogel study, I thought it was a bit of self-parody – like those jokes about engineers , where the engineer sees everything in terms of the concepts of his profession and thus misses the point. (Waldfogel, for example, refers to the “inefficiency” of gift-giving, as though the point of gift-giving were efficiency.) But Waldfogel wasn’t kidding. He just published a follow-up book, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays.

In fact, gift-giving has become increasingly rationalized and efficient. Children write letters to Santa specifying what they want; brides and grooms have bridal registries that do the same. Cash and gift cards are becoming more popular as gifts. There is no doubt that gift-giving is an economic exchange, and it would be silly to pretend thateconomic value has nothing to do with it (it’s the thought that counts). But it’s equally silly to think that it gifts are only economic and that they have no social meaning.


*The Form-1040-instructions quality of the prose is typical. For example, the Waldfogel survey also asks respondents to estimate the value of the gifts as “the amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift. If you exchanged the original gift, assess the value of the object you got in exchange for the original gift. If you exchanged the original gift for cash, put the cash amount you received here.”


maxliving said...

On the Freakonomics blog, they came to the conclusion that gift cards were the worst. They looked at places like ebay for people reselling gift cards, noting that they were selling them for about 80% of the original value (presumably because it's to a store they have no interest in). So gift cards, they concluded are the worst of both worlds (cash vs. present): they're bland and impersonal, and they result in deadweight loss.

Anonymous said...

But the maxim (no relation to maxliving)"don't look a gift horse in the mouth" adds no teeth to the deadweight argument. Gifts are meant to be appreciated even if they do not themselves appreciate. This raises the paradoxical question, "If a diet book, given as a gift, results in deadweight loss ..." (you can fill in the rest.) See Atkins and Montignac as reported in the E-Bay Window.

Jay Livingston said...

Hi Anonymous (I'd say Hey Nonny Nonny if we were on tutoyer terms). I agree. A bit of deadweight loss was one of my New Year's resolutions, and maybe one of yours too. As for the the bookmakers' line on our success -- i.e., the shape of abdominal windows, as you imply, somebody bet on the bay.