Saturday, December 03, 2005

Why is there dead weight loss in Christmas?

For several years now, Christmas time has elicited discussion by economists about the dead weight loss of Christmas gift giving. For the uninitiated, the idea is that often gift recipients place less value on a present than the donor paid for the present. For example, your aunt buys you a $45 sweater with a teddy bear on it, but you would only be willing to pay $15 for the sweater - the $30 difference is lost value or dead weight loss (it would have been better if auntie had just given you $15, or perhaps $20 - you would be happier than if you had the sweater and she saves a few bones.) In the end, it is more efficient to give money (or, perhaps, a gift card) at Christmas so that the gift recipient can more easily choose their "present." However, this seems counter to the entire spirit of gift-giving at Christmas, at least as it has evolved today.

Another potential problem is that gift givers are prone to giving gifts they feel good about, perhaps ignoring the hopes/dreams/desires of the gift recipient. Because gifts do not always match the preferences of the gift recipients, gift giving can cause a dead weight loss - that is potential recipient surplus that is not realized through gift giving.

As far as it goes, the dead weight loss argument is a fairly clever story, of which economists are justifiably proud - us economists pat each other on the back and complement each other on how clever and insightful we are (and how deeply cynical many of us are!). There is also significant empirical evidenc that the gift-giving process does entail a dead weight loss - people often value the gifts they receive significantly less than their cost.

However, is dead weight loss a necessary outcome of gift giving? The Dec. 3, 1905 NYT, however, presents a different interpretation of Christmas gift giving:

A gift should come spontaneously from the affection or regard of the donor, and should bear in its nature the individually appropriate thought. The mere cost of a gift should have nothing to do with its valuation. Price has no place in the mind of the loving recipient. Be the gift rich or simple, it is but the token of an affection which makes it small in comparison.

In other words, gift recipients should not have different utility levels across different gifts. Whether your gift is a new Rolex or a macaroni necklace, the Times suggests that the recipient should feel the same. Whether this is practical advice or not is debatable.

Moreover, the Times article suggests that the most important aspect of gift-giving is not the utilty that the recipient receives from the gift itself but that the recipient should receive utility simply through the act of receiving a gift. Again, this is likely an ideal situation that is difficult for gift recipients to achieve.

In another part of the article, the Times points out that:

Verily, master and mistress and maid would in all honesty join with that small boy in his earnest plea 'Don't give me anything useful for Christmas!" Give the useful and the necessary some time, yes, and thank you kindly; but let it not be at Christmans.

This suggests that gifts should have serve no utilitarian purpose for the recipient, or if they do, it is in a manner that is not standard operating procedure. So, the Times suggests that gift recipients should be considered in the gift-giving process - I am not sure both approaches can be simultaneously satisfied.

Economist story
Von Mises Institute article
In the Agora entry