In 1993 Joel Waldfogel published a paper “The Deadweight Loss of Christmas” in which he declared that the tradition of gift-giving causes economic losses for society because recipients generally value the items they receive as gifts less than the price that was paid by the givers. The source of this inefficiency is caused by the fact that the buyer is not the final consumer of a good and thus there may be a mismatch between the giver’s and the receiver’s preferences. Waldfogel’s study showed that gifts from friends and other people very close to the recipient are more efficient (because friends know the recipient's preferences better), and gifts from extended family are the least efficient. He estimated that out of a total of $38 billion worth of Christmas holiday gift expenditures the economic loss varied from between $4 to $13 billion. This result attracted attention and commentary from the wider academic community.

Here I want to present my modest view related to the issue.

Economists have the temptation to explain every phenomenon within models in terms of rational decisions made by homines economici. We sometimes forget that people are homines sapientes. The value of gifts is not only in the price paid for them. Things have values that are emotional as well as material. During the process of gift-giving, some value-added is created that can be referred to as sentimental value. What is the value of flowers you receive from a loved one? Not merely the price paid for them, that is for sure. Whenever you look at them you remember that person, make associations with them and this gives you a positive feeling. The sentimental value of gifts was excluded from Waldfogel’s study. In his study, the respondents (who were students enrolled in an intermediate microeconomics class – an additional aspect which has to be taken into account) were instructed to estimate the value of a gift as the “… amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift”.

The custom of gift-giving is a topic of interest not only in economics, but also in anthropology, philosophy, sociology, and psychology. All of these fields have come to the consensus that historically, gift-giving had a primarily economic function. It performed two different purposes: gift-giving was a signal of wealth and of the seriousness of intent between two groups attempting to cooperate and establish good social or trade connections. In addition, gifts sometimes worked as a form of insurance against hunger, with a group with surplus helping another with the implicit knowledge that they would be repaid at some future point. Yet as society has developed, the economic functions of gifts have weakened. Reasons may be the strengthening of the rule of law, the decreased dependency on social ties, and more independence, and improved living conditions. Occasions for gift-giving nowadays are limited to such events as birthdays, Christmas, specific holidays, and marriages. Personally, I remember how we used to receive a lot of gifts from relatives, and not only when I was a child during Soviet times, 20-25 years ago. I think gifts were more common those days, maybe because we did not have free access to things and connections mattered a lot; people were trying to improve their connections and foster cooperation. I believe most gifts we received back then were of a reciprocal nature. Things have changed now, gifts are losing the economic rationale of reciprocity, but the feelings associated with gifts still remain. I believe that regardless of any deadweight loss, the tradition of gift-giving will continue to exist, but the number of gifts given will decrease and will be limited to those given by close people. So even we, economists, will continue to give presents to our loved ones, regardless of any “economic inefficiency” associated with them. 

References:

Bradley J. Ruffle. 1999. “Gift-giving with emotions”. Journal of Economic Behavior & Organization. Vol. 39.

Bradley, J. Ruffle, and Tykocinski, Orit. 2000.  “The Deadweight Loss of Christmas: Comment”.The American Economic Review, Vol. 90, No. 1.

Solnick, J. Sara and Hemenway, David.  1996. “The Deadweight Loss of Christmas: Comment”. 

The American Economic Review, Vol. 86, No. 5.