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Notes From Scrooge: The Downside of Giving Gifts

Roll of money in a gift box with red ribbon and bow

Economists don’t like gifts. Or to be more precise, they have a hard time making sense of gift giving as a rational social practice. From the standpoint of market reasoning, it is almost always better to give cash rather than a gift. If you assume that people generally know their own preferences best, and that the point of giving a gift is to make your friend or loved one happy, then it’s hard to beat a monetary payment. Even if you have exquisite taste, your friend may not like the tie or necklace you pick out. So if you really want to maximize the welfare your gift provides, don’t buy a present; simply give the money you would have spent. Your friend or lover can either spend the cash on the item you would have bought, or (more likely) on something that brings even greater pleasure.

This is the logic of the economic case against gift giving. It is subject to a few qualifications. If you come across an item that your friend would like but is unfamiliar with—the latest high-tech gadget, for example—it’s possible this gift would give your ill-informed friend more pleasure than something he or she would have bought with the cash equivalent. But this is a special case that is consistent with the economist’s basic assumption that the purpose of gift giving is to maximize the welfare, or utility, of the recipient.

Joel Waldfogel, an economist at the University of Minnesota, has taken up the economic inefficiency of gift giving as a personal cause. By “inefficiency,” he means the gap between the value to you (maybe very little) of the $120 argyle sweater your aunt gave you for your birthday, and the value of what you would have bought (an iPod, say) had she given you the cash. In a recent book, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays, he elaborates on the concept: “The bottom line is that when other people do our shopping, for clothes or music or whatever, it’s pretty unlikely that they’ll choose as well as we would have chosen for ourselves. We can expect their choices, no matter how well intentioned, to miss the mark. Relative to how much satisfaction their expenditures could have given us, their choices destroy value.”

Beyond playing out the economic logic against gift giving, Waldfogel has conducted surveys to measure how much value this inefficient practice destroys. He asks gift recipients to estimate the monetary value of the gifts they’ve received, and the amount they would have been willing to pay for them. His conclusion: “We value items we receive as gifts 20 percent less, per dollar spent, than items we buy for ourselves.” This 20 percent figure enables Waldfogel to estimate the total “value destruction” brought about, nationwide, by holiday gift giving: “Given the $65 billion in U.S. holiday spending per year, that means we get $13 billion less in satisfaction than we would receive if we spent that money the usual way—carefully, on ourselves. Americans celebrate the holidays with an orgy of value destruction.”

If gift giving is a massively wasteful and inefficient activity, why do we persist in it? It isn’t easy to answer this question within standard economic assumptions. In his economics textbook, Gregory Mankiw tries gamely to do so. He begins by observing that “gift giving is a strange custom” but concedes that it’s generally a bad idea to give your boyfriend or girlfriend cash instead of a birthday present. But why?

Mankiw’s explanation is that gift giving is a mode of “signaling,” an economist’s term for using markets to overcome “information asymmetries.” So, for example, a man contemplating a gift for his girlfriend “has private information that the girlfriend would like to know: Does he really love her? Choosing a good gift for her is a signal of his love.” Since it takes time and effort to look for a gift, choosing an apt one is a way for him “to convey the private information of his love for her.”

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