No-Ho-Ho: The Economics of Holiday Gift Giving

With holiday gift shopping in season and the COVID-19 pandemic rampant, consider the relative merits of giving cash instead of presents.

A study of gift giving found that recipients undervalue presents by as much as 30 percent of the purchase price. Givers, by contrast, implicitly value them more or less fully ex ante; otherwise they wouldn’t have been purchased. Worldwide, this measure of undervalue (an economic “deadweight loss”) totaled $25 billion, a figure that ignored both the givers’ cost of time and other resources spent shopping, and the recipients’ cost of returning undervalued presents for store credit.

These findings led economist Joel Waldfogel, author of Scroogenomics: Why You Shouldn’t Buy Presents For the Holidays (Princeton University Press, 2009), to counsel against giving in-kind gifts. His “beef is not with the level of spending and consumption at Christmas but rather with the waste the spending generates.” (p. 103) He quotes an ascetic passage written in 1850 by Harriet Beecher Stowe: “There are worlds of money wasted, at this time of year, in getting things that nobody wants, and nobody cares for after they are got.” (p. 77).

Transferring cash instead of in-kind goods and services often improves economic welfare by enabling recipients to indulge fully their private tastes and preferences. A stigma nevertheless attaches to cash gifts that seem cold and thoughtlessly indifferent. Consider also the absurdity of family members, friends, and colleagues celebrating special occasions by exchanging crisp $20 bills. Gift cards can be a more efficient alternative; a potential sweet spot between cash and presents, although some deadweight loss remains inevitable because cards typically are accepted only by the stores that issue them, and often go unredeemed. Waldfogel (pp. 131–133) suggests another alternative: donating cash to economically efficient charities in the name of gift recipients.

Waldfogel (p. 105) offers two robust straw arguments against his claim of wasteful economic behavior: (1) “Christmas giving among private individuals is voluntary, and whatever people do voluntarily cannot by definition be inefficient. Rather, it’s all for the best”; and (2) “People have been giving Christmas gifts, in their current form, for most of the last century—and do so throughout the developed world. An institution so durable could not possibly be inefficient. If it were, it would have gone away already. It must be all for the best.” Waldfogel counters by dismissing in-kind gifts as an objectively wasteful, yet persistent custom. An analogy might be drawn to the Native American tribal custom of “potlatch”: lavish feasts hosted by wealthy individuals, at which especially costly presents were given to guests who often destroyed them, and yet were expected to reciprocate their host’s generosity. That custom withered after naïvely paternalistic American and Canadian authorities banned it for being wantonly wasteful.

Waldfogel (p. 41) identifies “three basic economic reasons to give people stuff”:

The first, recalling Robin Hood, is to take from those who do not need and give to those, like our poor relations, who do. We call this ‘redistribution.’ The second, recalling the way parents treat kids and governments treat crackheads, is to promote sensible consumption. ... We call this second motive ‘paternalism.’ The third motive, to make recipients as satisfied as possible, is the way we treat loved ones whom we trust to make good choices. This is called ‘altruism.’

By this light, holidays and other special occasions provide face-saving cover for giving and receiving alms.

But consider whether presents are wasteful in a context that explains the institution’s evident durability. In an earlier work, Waldfogel [“The Deadweight Loss of Christmas.” The American Economic Review 83, no. 5 (December): 1328–36 (1993), p. 1335, italics added] noted in passing that “the giver may derive some utility from giving the particular gift, which he would not derive from giving cash or another gift”; i.e., a fourth economic reason for giving presents. The Roman stoic philosopher Seneca [On Benefits, University of Chicago Press (2011)] emphasized this aspect of giving in his classic treatise on the nature of generosity.

Reciprocal in-kind gifts also serve to establish and maintain mutual trust, cooperation, and other social virtues that help individuals alleviate the devilish economic problem of resource scarcity; i.e., a fifth economic reason for giving. The choice of a gift, and the recipient’s response to it, encourage inherently self-interested givers and recipients to interact as if their private utility functions were entwined, and to continue maximizing their joint utility after gift-giving occasions have passed.

The giver’s utility is lessened ex post when recipients undervalue presents. Worthy recipients therefore reciprocate all gifts by valuing them according to the spirit in which they are given; Waldfogel dismisses this response as “sentimentality.” Less charitable recipients exaggerate valuations to feign good moral character and social grace, and also to encourage a continued flow of presents that are valued positively, albeit below cost. Astute givers recognize mawkish artifices, and adjust their giving practices accordingly.

A hackneyed cliché counsels that we shouldn’t give until it hurts; instead we should follow Seneca’s counsel by giving generously and receiving appreciatively until it feels really good. Individuals tend to agree, and scrooge economists are hard pressed to prove them wrong.

[This post draws from the author’s article, “Defending the Humanistic Virtue of Holiday Commercialism,” published in Essays in the Philosophy of Humanism 23.2 (2015), pp. 265–276.]

James A. Montanye is a Research Fellow at the Independent Institute.
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