The Deadweight Loss of Christmas

Abstract

When economists comment on holiday gift-giving, it is usually to condone the healthy effect of spending on the macroeconomy. However, an important feature of gift-giving is that consumption choices are made by someone other than the final consumer. A potentially important microeconomic aspect of gift-giving is that gifts may be mismatched with the recipients' preferences. In the standard microeconomic framework of consumer choice, the best a gift-giver can do with, say, $10 is to duplicate the choice that the recipient would have made. While it is possible for a giver to choose a gift which the recipient ultimately values above its price-for example, if the recipient is not perfectly informed-it is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash. In short, gift-giving is a potential source of deadweight loss. This paper gives estimates of the deadweight loss of holiday gift-giving based on surveys given to Yale undergraduates.' I find that holiday gift-giving destroys between 10 percent and a third of the value of gifts. While these recipients may be unrepresentative of the U.S. population, their gifts are not necessarily unrepresentative. Holiday expenditures average $40 billion per year, implying that a conservative estimate of the deadweight loss of Christmas' is a tenth as large as estimates of the deadweight loss of income taxation. I also explore how deadweight loss and the tendency to give cash gifts vary with the relationship and age difference between giver and recipient. I find that gifts from friends and significant others are most efficient, while noncash gifts from members of the extended family are least efficient and destroy a third of their value. I develop a simple expected-utility model to explain the decision to give cash, as opposed to in-kind gifts. The data are consistent with the model: cash gifts are most common from the sorts of givers whose noncash gifts have the lowest expected value to recipients (given their cost) and high variability in recipient valuation.

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