Since holiday season is around the corner, I am writing a little bit about gift giving and signaling inspired by an article I read on The New York Times by Josh Barro. You can find it here:
Economists who are constantly worried about GDP growth should love the holiday season. In the United States, retailers make approximately 25% of their yearly sales and 60% of their profits between Thanksgiving and Christmas. However, Joel Waldfogel, an economist from Stanford University, wondered whether all of those gifts were just a waste of resources and published a paper in 1993 titled “The Deadweight Loss of Christmas” saying that in fact Santa Claus is nothing more than a dead weight loss.
Students were asked two questions.
- Estimate the total amount paid for all the holiday gifts you received
- Apart from the sentimental value of the items, if you did not have them, how much would you be willing to pay to get them?
The results put the average receiver’s valuation at 90% of the buying price. The missing 10% is therefore a deadweight loss. If the giver gave the cash value instead of the gift itself, the recipient could then buy what she really wants, and be better off for no extra cost.
But not all economists agree with this vision. David Autor from M.I.T. says gift-givers have an advantage when they know their recipients well enough to give them something they want badly but wouldn’t buy for themselves. This lesson is validated by behavioral economics, which shows that people are irrationally loss-averse when it comes to money. “There are things you wouldn’t buy for yourself that you wouldn’t give up, once you had them, at their market price". Others, like Alberto Alesina of Harvard said choosing a gift “is a signal of intensity of search effort,” a.k.a “is the thought that counts” or as we saw in class, signaling.
It is interesting that the deadweight loss problem that Waldfogel identified in 1993 might be decreasing since the introduction of gift cards. CEB TowerGroup, a research firm that tracks gift card sales, says they grew at a more than 10 percent annual pace through much of the first decade of the century. According to CEB data, Americans loaded $126 billion onto gift cards in 2014, or almost 1 percent of G.D.P.
Now, I would like to discuss a gift Alice received last Christmas from Bob - A box of delicious chocolates. It is important to let you know that Alice was on a diet. Carol´s wedding was coming up and Alice wanted to look terrific in that designer dress she bought and therefore intended to lose a couple of pounds. There are three possible scenarios:
a) Gift Mismatching leads to deadweight loss : We know Alice was on a diet so she would have never bought this high calorie containing gift for herself and doesn’t end up eating the chocolates.
b) Revealed preference for chocolate: Even though Alice was on a diet she ate half of the chocolates in the box that same day! Thus, Bob achieved exactly what he wanted to do. He identified an item Alice would not have bought for herself but apparently wanted.
c) Now Alice feels like she should not have eaten the chocolates, or at least not so many of them at once. Behavioral economists call this phenomenon “hyperbolic discounting”: we overrate the value of immediate pleasures compared to delayed ones, and may do things today, just like Alice, that we would have said yesterday we wouldn’t do and will say tomorrow that we should not have done.
So what should we do? I think you have to try hard to guess the preferences of each person on your list and then choose a gift that will have a high sentimental value, or signaling power. If you don´t achieve this you will be generating a deadweight loss, a sacrilege for us economists. So if you can’t think of a good gift opt for giving cash, or better yet gift cards. They are a lot like cash but have emerged as a way to give the choice to the recipient without the ickiness of cash.
