The Economics of Gifting – Part II of II

Picking up where we left off in the first part, if the designers of Secret Santa obviously weren’t familiar with principles of economics, at least the same problem isn’t faced with economists, so what trick do they have hidden up their sleeve? Glad you asked, because economists have long since refused to partake in and made known their distaste for the practice of gifting. The reason behind it being deadweight loss (Waldfogel, 1993), a pair of words so distinctly abhorrent to the ears, its nomenclature itself composed of the unparalleled likes of dead, weight and loss in the English language, that few could find one equal in its sense of foreboding; how then is one to blame if the natural conclusion to jump to is that it typifies the most unpalatable parts of economics? This was why when, in fact, I happened to come across this particular Wired piece titled “Economists want you to have the most boring Christmas possible” from December 17^th (just in time for it to make an appearance here), I scarcely batted an eye. It won’t be completely inappropriate here, therefore, to mention in passing why it’s no wonder that economists, in general, aren’t running around being the life of the party, so to speak. Not to worry though; if you usually find yourself sans an invitation to a Christmas or New Year’s Eve party, at least this year you can find solace in that it’ll be the same for everyone else thanks to the night curfews who, along with Santa Claus, are coming to town.  Nevertheless, it all begs the question: Do we really deserve the bad rap which articles such as the one above most graciously bestow upon us?

The entire concept of deadweight losses due to gifting is centred around how the value of a gift is often found to be less in the eyes of its recipient than what the gifter paid to purchase it. Now that may well be the case, I have no qualms in admitting it. One too many gifts have been unwrapped by the author with excitement that fades away with the first glance at its contents, but an outward appearance pretending otherwise has to be projected nonetheless, lest the gifter’s feelings bear the brunt of the catastrophe. Still, there is one aspect that is being missed here altogether, I reckon, namely the consumer surplus of the gifter themselves. Indeed, since the recipient of the gift is its consumer, we tend to associate the consumer surplus accrued in this transaction directly with them. However, if the government revenues from levying a tax can be meted out the treatment of being considered as social gains (while computing deadweight losses), why not the same with the benefit accruing to the poor, naïve gifter? After all, both are, in a way, intermediaries or third parties in the transaction. There’s no doubt that gifts received from significant others, close friends and immediate family members are somewhat accurate representations of the giftee’s preferences, although since they aren’t chosen by the giftee, there may be some deadweight loss to contend with in these cases too. What is of greater concern are the gifts given by extended family members—think grandparents, aunts and uncles— the source of the greatest loss to society (Waldfogel, 1993). “Oh, what an atrocity! That’s it! No more, please, no more of this, I beg you! I cannot bear it any longer. Ordnung muss sein! Don’t you understand? Are you incapable of showing mercy?! Put an end to it this very moment— cash only from now onwards for therein lies my precious — efficiency!”, the economists cry out in a sorry state indeed. But not yours truly who finds it hard to agree with the fact that there is enough of a deadweight loss to raise such a hue and cry about.  Allow me to explain. On pursuing the thought with a little deliberation, the reader should find that it can all be accounted for by the reliable and evergreen Law of Diminishing Marginal Utility, straight out of your routine Econ101 class. Our loved ones, more capable of knowing us intimately, are also the ones we are around most often. They get plenty of opportunity to shower us with their affections as and when they please— co-existing under one roof or at least sharing some time of the day together, for one, besides being right there beside us, sharing in all our feelings of joy and sadness, not to mention the small, seemingly mundane gestures that go a long way in breaking up the monotony of everyday life. The absolute value of this ‘love’ is so high that its marginal value (reflected in the buying of a gift) is small. Surely you wouldn’t begrudge them not buying a present for you for some reason. Yet, out of the kindness of their hearts, they are thoughtful enough to adjudge that special occasions warrant a certain something special or the other and so gifts are in order. Extended family and the like, on the other hand, one does not meet so very often that one can be exposed to such a degree of interaction with them, but the love is there nonetheless (let us assume so for the time being, or for the more cynical, the need to pretend that it is). Its absolute value being comparatively lower, they find the need to (over)compensate through grand(er) gestures like gift-giving wherein the stakes are high in the shape of a high marginal value. Clearly, the more expensive this gift is (and the more likely to involve deadweight losses of higher absolute values), the more the gifter must have felt the need to compensate, thus signalling a higher worth placed by them on the exchange.

One more argument, if you will: Presumably you spend on yourself all the time; depending on your age and financial position, if not your own money, then your parents’. Inevitably, the marginal benefit accrued due to additional consumption exemplified by, in this instance, the particular gift you have received, would be quite trifling, so would the highest price you would have been willing to pay for it AKA your reservation or choke price (another gory economic term for you) which in turn is proportional to the benefit you are entitled to receive over and above the price you have paid for being able to consume AKA your consumer surplus. Think of this as the feel-good quotient associated with getting an extraordinarily good deal on something; you’re instantly made happy by purchasing things you want at lower prices than what you would have been willing to cough up for them if worse came to worst, rather than being faced with the situation where you didn’t have the thing at all. If you’d care to recall however, the extended relative, our gifter, is only spending a sum of money equal to what the gift cost them on us; they’re not around to spend on us every day of our lives. The consequence: More willingness to pay (which can be imagined as a demand curve with a higher choke price) translating into greater consumer surplus derived. Not to mention the Endowment Effect, according to which individuals attach a higher value to objects they own as compared to the very same objects in the event that they are not personal possessions. In our case then, this implies that the giftee might not be all that dissatisfied with the transaction as is made out to be after all.  So why not make hay while the sun shines?

In conclusion, yes, I did just propose that we put a price on how much someone loves you and is willing to spend on you. So what? That’s just how economists roll. At least I’m not suggesting that cash replace presents altogether for the same reason that cultured dinner guests don’t bring cash for the host when they come along — it just doesn’t sit right with socially accepted behaviour, irrational (to few) as it may be. Besides, where’d all the suspense be without having to plod through copious amounts of packaging and wrapping paper? And worst case scenario, it can always be re-gifted, right? In which case, it ought to be pointed out, should the same gift exchange hands several times, it would potentially go on creating gifter (consumer) surplus in traversing successive rounds (a gift multiplier of sorts), besides also saving the gifter the time and effort to purchase a brand new one.

It is my sincere hope that that didn’t ruin gifting and/or suck the joy out of the festive season for you. Although the timeframe issue should be sorted out, what with this article being published only after Christmas. Terribly sorry if it did or will do so in the future, etched indelibly into your memory. If I may be so bold to offer as consolation, at least you can rest easy knowing that there may just be the tiniest reduction in the inefficiency at large in our world. And in the end, isn’t that the best gift we could have ever hoped for all along? So on that note, my reader, allow me to wish you a very Happy New Year! May it be our most economically-sound yet.

With season’s greetings,

Anoosheh Zahra Mirkhushal

SY B.Sc. Economics

References

Waldfogel, J. (1993). The Deadweight Loss of Christmas. The American Economic Review, 83(5), 1328-1336. http://www.jstor.org/stable/2117564.