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The economics of festival gifts

November 14, 2004

It feels great to give gifts during festivals. It feels even nicer to receive them.

But often, as we all know, when the package is opened there is a sense of a let-down. How many times have we muttered to ourselves, "I wish they had given cash instead?"

Some years ago, an economist called Joel Waldfogel decided to analyse gift-giving. Being American and Christian, he naturally focused on Christmas.

His paper was published in the American Economic Review. But his findings are valid for everyone, including Indians.

The basic insight he provided was of what he called *"The deadweight loss of Christmas." This can equally mean the "The deadweight loss of Diwali." It arises from the fact that the recipient usually gets something he doesn't want.

Deadweight loss consists of the net loss in social welfare on account of benefits differing from the foregone opportunity cost. Usually, this is some combination of lost consumers' surplus and lost producers' surplus.

It is an excellent indicator of inefficiency as it graphically portrays the difference between what people want and what they get, not just by way of gifts but also bad taxes, poor government policy and so on.

Waldfogel set out to quantify the amount that people didn't want. That is, he tried to ascertain how differently, in terms of money, people would have spent an amount equivalent to the gift's cost.

After a careful survey, he concluded that the difference varied between 10 and 33 per cent. Given that Americans spend around $ 50 billion during Christmas, Waldfogel put the deadweight loss of Christmas shopping at as high as between $ 5 billion and $ 17 billion.

The logic was straight from neoclassical economics where the consumer is supposed to be best off when he chooses the highest-ranked good on his "utility" scale. If he has to choose something else or is given something else, the difference is the deadweight loss, said Waldfogel.

But the most interesting finding was that the gap is narrower for gifts from friends than it is from gifts from the family. Clearly, people expect the family to be more clued into what they want. (I expect a bottle of vodka from my brother and cash from my sister. But my brother always gives me whiskey and my sister always gives me music or books).

At first, there was a stunned silence. The sheer size of the deadweight loss struck people dumb.

Then the criticisms began. The most erudite of these was that it was wrong to equate personal utility with dollars spent. A gift has its own intrinsic value, said the critics, rather as Krishna had told Sudama who gave him a pouch of rice when he went to see him because that is all he could afford. In other words, you have to impute a value to the source as well as the sentiment.

But mere logic doesn't go far in the US. You need data and experiments and empirical verification.

So a couple of other economists got into the act and did their own "tests". They asked students to give specific gifts, rather than bundles as Waldfogel had done. They also used a much larger sample of students and their questions were more detailed.

Not surprisingly, they reached the opposite conclusion: more than half the students who received the gift valued it above its retail price. This mean an improvement, rather than worsening, of social welfare.

It also turned out that people who received gifts that they had asked for the equivalent of receiving money -- valued such gifts less. That is, there is a value to be attached to the surprise element as well.

The core of the argument of those who disagreed with Waldfogel was that gifts are special goods and can't be judged like ordinary goods. The value lay in the sentiment and not the price.

Waldfogel was not to going to be put off. He conducted another survey, this time with over 450 students. There was still a deadweight loss but less than before.

There matters rest for the time being.

*The Deadweight Loss of Christmas, AER, Volume 83, Issue 5, 1993

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