Deadweight loss of Christmas: Economist explains why gifts are inefficient

Will Chen — Mon, 25 Dec 2006 11:12:07 +0000

Did 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!
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!)

Written by Will Chen and published on Wise Bread. Read more articles from Wise Bread.