There is less than a week before Christmas, and I've barely started my shopping.
Too often this time of year, people (myself included) are focused more on the fact that they bought something (anything) for somebody else, and less on whether the recipient will actually value the gift. We tell ourselves that it is the thought that counts. But when people give gifts just for the sake of giving gifts, it drags on the economy. It's inefficient to give a gift that is worth more than the recipient would be willing to pay for it herself.
Economists call this deadweight loss. Giving unwanted gifts tends to destroy wealth and aggregate utility in the economy. When you give your friend something that she doesn't want, no value is added. In addition, she may have to endure the costs of storing and loathing the unwanted gift.
The author of Scroogenomics, Joel Waldfogel, says that people do a more thorough cost-benefit analysis when they are shopping for themselves than when they are shopping for others, but less so for others. “The process at Christmas, by contrast, has givers shooting in the dark about what you like… to make matters worse, we do much of this spending with credit, going into hock using money we don’t yet have to buy things that recipients don’t really want.”
Search costs also contribute to the dead weight loss of holiday shopping. The act of searching for the perfect gift takes a lot of time and energy, and this increases its cost because you could be spending your their time in a different activity. Even if you find the perfect gift, the time you spend searching for it is costly.
Consider Black Friday shoppers, the people who line up in the middle of the night to wait for stores to open with sales. Is it really worth the 12 hours that they spent waiting in the parking lot? Have they considered their opportunity cost (i.e., what they’d make if they spent their time working instead of standing in line, their utility if they spent the time in leisure instead of the parking lot)?
Even though I abstain from Black Friday altogether and elect to do my holiday shopping online, I can't escape creating dead weight loss. Although I may find efficiency gains by avoiding the mall crowds, I still experience high search costs.
Many of us choose to buy gift cards instead of guessing what our friends and family actually want. Unfortunately, giving gift cards creates dead weight loss too. Gift cards are essentially an interest-free loan to retail stores, and recipients tend to value them for less than their cash value. Additonally, nearly a quarter of gift cards are never redeemed.
Last year, my office did a Secret Santa exchange, and we had a $10 cap. I gave my coworker a $10 bill. I'm confident that I didn’t destroy any wealth in that transaction, nor did I incur any search costs. I also suspect that my coworker found utility in the fact that he may buy something that he actually wants.
I was delighted to learn that my favorite libertarian, Ron Swanson, does this too. On the latest episode of Parks and Recreation, he admits: “Every year I give Leslie the present I give everyone: a crisp 20 dollar bill."
My point is not to say that we should stop giving gifts altogether. Who wants to live in a world in which we just exchange cash? Even Ron Swanson embraces the value of good gift giving. He recently rallied the parks department to make a thoughtful gift for his coworker Leslie. Certainly, good gift giving has positive externalities. I’m saying that we should just try to stop giving unwanted gifts.
Photo Credit: stevendepolo