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Smiling at a deadweight loss
Should we be simply be giving each other cash, or are presents better after all?
28 years ago, then young-ish economist Joel Waldfogel wrote a paper, The Deadweight Loss of Christmas, in which he argued that giving gifts at Christmas (and similar holidays with gift-giving rituals) is a colossal waste of money. Recipients value the gifts they received as less than the amount the giver has spent on it, and he calculates this deadweight loss at between one-tenth and one-third of the amount spent. In the US in 1992, that corresponded with $4-$13 billion. Big if true. But is it?
Every year in December, journalists and bloggers around the world cite this paper (I actually did so myself), often to point out, and poke fun at, the crazy excesses of the holiday season. But not all economists agree with Mr. Waldfogel. In 1996, Sara Solnick and David Hemenway challenged his findings in a comment reporting on their own research, which suggests that recipients commonly value a gift higher than its price (in their case, recipients valued the gifts at 214% what the giver paid). John List and Jason Shogren looked at both studies in 1998, and did their own, more robust analysis, finding that gifts do indeed produce a welfare gain, but a somewhat more modest one, at 121–135% of the spend. A little later, economist Bradley Ruffle and…
