The Economics of Gift-Giving

Christmas is quickly approaching this year. Many Americans will give gifts to their loved ones spreading the season’s chear. Do gifts provide the maximum value to the recipient or is there a better alternative? This question, or a version of it, has been asked over the years.

Economist Joel Waldfogel published “The Deadweight Loss of Christmas” in 1993 to showcase the loss of value due to gift-giving during Christmas.  The Washington Post provides a synopsis of Waldfogel’s paper and the opinions of other economists. He recommends giving cash as a gift. Cash seems like a reasonable gift because the receiver can use the money for what they value the most instead of the amount the giver values the item.  You would not spend more money for an item than the price the receiver would spend. Giving cash prevents deadweight loss which is the loss of value due to economic inefficiency. Therefore, cash is considered the economically efficient gift. Economic efficiency is an economic state in which resources are allocated to maximize the benefit to the person. This idea of giving a gift based on economic efficiency makes sense from a logical perspective, but is limited in scope. You have to ask a very precise question such as “how much would you have paid for this item” to notice the inefficiency. This perspective ignores the benefits that can’t be quantified, such as the emotional connection between giver and receiver.

Currently, there is no way to quantify the sentimental value of gifts. For example, gifts could inspire someone, bring happiness, spread love, or encourage self-improvement. Precious memories and photographs can’t be precisely valued. One method that could quantify such benefits is to measure the dopamine level in someone’s brain before and after receiving a gift. You can not compare money with the dopamine level. Therefore, determining the benefit of gifts via dopamine level changes with money is not a perfect comparison.

Christmas is supposed to be a time of joy, not perfectly logical gift-giving. Experiencing the emotional benefits of life is what makes being human so spectacular. Gift-giving is meant to be fun.  Therefore, give the gift you want to and that you think will benefit the recipient, regardless of the economic inefficiency economists claim gifts cause. The benefits can outweigh the inefficiency. Have some fun with your choice and think of cash as a good backup in case you do not have a good idea. The exact benefit of that gift can’t be fully calculated when considering the psychological benefits associated with Christmas. Your family will remember a special gift more than money.

“Legacy is greater than currency” – Gary Vaynerchuk

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