Deadweight loss of Christmas: Economist explains why gifts are inefficient

by Will Chen on 25 December 2006 12 comments

Christmas tree at Rockefeller centerDid you unwrap any crappy presents this morning? Are you thinking that all the shopping and running around was a big waste of time?

You might be right, says economist Joel Waldfogel.

Waldfogel estimates that people generally spend 16% more on presents than they’re worth to those who receive them. He calls this phenomenon “the deadweight loss of Christmas.”

For example, a deadweight loss is created when you spend $20 to give me a DVD that I would spend only $15 to buy for myself. Economist Tim Harford explains:

Christmas presents are wasteful, and we even know how wasteful: 16%. This figure comes from surveys by economist Joel Waldfogel, who asked how much cash his respondents would have been willing to pay to buy their Christmas presents. The answer is, sadly, 16% less than what they cost.

The most inappropriate gifts, costing 50 per cent more than their value to the recipients, come from elderly relatives.

Sensibly, many elect to give cash instead. Unsurprisingly, friends and partners give less wasteful gifts.

It's interesting to note that the most wasteful presents are those that cost roughly between 25 and 50 Pounds - expensive enough to assuage the guilt of a hurried choice, but cheap enough not to require double-checking with those close to the recipient. Link

If gifts are 16% less valuable to the gift receivers, there's no reason to give expensive gifts. In fact, the more expensive the gift is, the more money you're wasting!

These deadweight inefficiencies add up. The Economist estimates that while Americans "spend $40 billion on Christmas gifts, $4 billion is being lost annually in the process of gift-giving."

My Personal Deadweight Loss Calculation

Bummed about not getting that Kevin Federline CD? Perhaps I can soothe your pain by sharing my own personal 2006 Christmas gift disappointments:

Gifts received Cost to purchaser
Value to me
Schure E4C headpohnes $167.99 $125
xkcd t-shirt $14.99

$14.99

I love this gift!

ackground-color: #ffff99"> Scientific American Subscription

$24.97

$2

Come on, that's what my dentist is for.

USB Rocket Launcher $39.99

$39.99

Subtract cost of taking someone's eye out = -$300,000

Pride and Prejudice BBC Edition $185.90 Finding out the girl I like thinks I'm gay? Priceless.

I can't say for sure this is how Waldfogel tabulated his statistics, but I'm sure it is probably the same.

Does all this inefficiency and disappointment mean Waldfogel is right and that we should give up on Christmas gift giving as one big waste of time?

Probably not, considering there are other economic studies that point out the exact opposite: i.e. some people value the gifts they receive higher than the actual retail price.

The lesson here is to not to be resentful of how wasteful Christmas is, but rather to be mindful that expensive gifts are not as valuable as thoughtful ones.

Calculating the deadweight loss of Christmas gifts is a coldhearted project, but it leads to a paradoxically warmhearted conclusion: the fact of giving may be more important than what you give. Start with “Bah, humbug” and you somehow end up with “God bless us, every one.” James Surowiecki

P.S. Anyone want to buy a Pride and Prejudice DVD box set for cheap?

(Photo credit: mitzabot_goes_boom under Creative Commons Attribution-NoDerivs 2.0 license. Thanks Dave Aton for the correction!)

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Greg Go's picture
Greg Go

Maybe you should value the tshirt closer to $40.

Guest's picture
Flimsy Sanity

"Come on that is what the dentist is for" made me laugh out loud, startling my dogs. You have a great blog. The DVD set might be your fruitcake - regifted forever.

Will Chen's picture

Do you think your dogs would enjoy the DVDs?

Greg, don't forget we're going to launch our awesome t-shirt blog in 2007.

Lynn, that is your answer to everything.

"I need to buy a birthday present."

"Go to eBay."

"I need some socks"

"Go to eBay."

"I need a date for the prom."

"Go to eBay."

Why don't I just put some 'tossin on it and send the DVD into eBay? Seriously, here's how obsessed this woman is about eBay:

Beware of PayPal Chargebacks

How to make an effective eBay Listing

eBay: The Answer to All Your Problems

 

 

Lynn Truong's picture

ebay it. that's the christmas return superstore.

Andrea Karim's picture

Tim Harford gave a recent interview on my local NPR station about this - it was fascinating. Also, he has a lovely British accent, so he sounds even more intelligent than he probably is. http://www.kuow.org/programs/weekday.asp?Archive=12-20 Some of the information makes you want to slap your forehead and say "Of course! Why didn't I think of that?". Great post.

Guest's picture
Flimsy Sanity

You can also sell books and DVD's on Amazon if eBay bores you. Just click on the "sell yours here" button and give them access to all your accounts.

Will Chen's picture

Thanks Flimsy, I will give that a shot.

Guest's picture
lisa

How cheap? I love this series/movie! Besides, a girl giving you P&P doesn't mean she thinks you're gay - it means she wants you to understand her better. Maybe you should watch it - and try to be Mr. Darcy.

Will Chen's picture

I actually did end up watching it Lisa.  =)

I love the part where *spoiler*

Lizzie said "He's a gentleman and I'm a gentleman's daughter."

Right on!

Maly's picture
Maly

Lisa is right! That she gave you the P&P dvd as a gift means she really, really likes you and wants you to be a part of her life. Seriously. Because P&P fans are SERIOUS. If you think the Anderson Cooper fetish among your friends is bad, Just take an informal poll of how many of your female friends are in love with Mr. Darcy/Colin Firth and prepare to be amazed. =) An inordinate number of the female population is smitten....

Will Chen's picture
Will Chen

Thanks Maly, now I feel much better about the gift.

Now if I can just get myself a giant estate like Mr. Darcy I will be beating back women with a stick.

Andrea Karim's picture

I have to vote against Darcy. I mean, I love a curmudgeony guy with no patience for social niceties, but that's not the kind of man you take home to Mom. He's sort of an old-school bad boy, but without any of the actual badness to make him interesting.

Yes, that's it. Now, I'll just sit back and let the Screaming Darcy Fans pummel me with hate mail ("You don't even know what you're talking about, you illiterate schmuck!").

"Screaming Darcy Fans" would also be a good name for a band.