12.28.2010

Guest Post: The Deadweight Loss of Gift Giving

There is a pretty substantial amount of literature on the deadweight loss associated with gift giving. In short, when one buys a gift for $50 for someone but that someone does not like it and in fact would have only paid $10 for it, then there is of course a $40 deadweight
loss.

Some economists estimate the deadweight loss during the holiday season alone is roughly $13 billion in the US and $145 billion worldwide. On a net basis, this is of course viewed as a transfer of wealth form households to private sector businesses. (Note: net basis since some
of the money flows from businesses back to household employees who work at stores, etc).

So how to we rid ourselves of this deadweight loss without being complete scrooges? Well, cash and gift cards vastly reduce the deadweight loss, since gift receivers can use $50 to buy something they deem worth $50. There could still be some deadweight loss, think of a gift card to a store someone doesn't really like, or a person who attributes value to receiving a wrapped present versus cash.

Another potential solution, not surprisingly, is trade. In this story, kids at a Brooklyn school rated their satisfaction with gifts which in aggregate was around 50. After students were allowed to trade gifts with each other, that satisfaction jumped to 82 in aggregate.

A simple rule then is "if the value one attributes to receiving a wrapped present is less than the expected outcome of the deadweight loss, where deadweight loss is equal to confidence in gift choice (various probabilities) multiplied by the value the receiver atributes to the gift (various payoffs) all of which is then subtracted from the cost of the gift, then give cash." Gift receipts work too, but in order to return the gift we need to take gas prices multiplied by miles to store multiplied by...HAPPY HOLIDAYS!!!

Steven Quattry is a recent graduate of Columbia University's School of International and Public Affairs and works in macroeconomic research.

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