How “inefficient” is Christmas and the tradition of gift-giving generally? According to this paper, The deadweight loss of Christmas, published in the prestigious American Economics Review 20 years ago this month (and from which the figure above is taken), holiday gift-giving destroys between 10 percent to one-third of the value of gifts. If you don’t feel like reading this classic paper for yourself, here is an overview from The Economist:
At the simplest level, giving gifts involves the giver thinking of something that the recipient would like—he tries to guess her preferences, as economists say—and then buying the gift and delivering it. Yet this guessing of preferences is no mean feat; indeed, it is often done badly. Every year, ties go unworn and books unread. And even if a gift is enjoyed, it may not be what the recipient would have bought had they spent the money themselves. Intrigued by this mismatch between wants and gifts, in 1993 Joel Waldfogel, then an economist at Yale University, sought to estimate the disparity in dollar terms. In a paper that has proved seminal in the literature on the issue, he asked students two questions at the end of a holiday season: first, estimate the total amount paid (by the givers) for all the holiday gifts you received; second, 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? His results were gloomy: on average, a gift was valued by the recipient well below the price paid by the giver. The most conservative estimate put the average receiver’s valuation at 90% of the buying price. The missing 10% is what economists call a deadweight loss: a waste of resources that could be averted without making anyone worse off. In other words, if the giver gave the cash value of the purchase instead of the gift itself, the recipient could then buy what she really wants, and be better off for no extra cost.
While the general intuition of this paper might be correct (indeed, this is why we are big fans of gift cards and cash gifts generally), its methodology is of limited and doubtful value at best. Suffice it to say that data sets based on self-reported surveys are especially suspect. What are some other problems with Professor Waldfogel’s methodology? [Hint #1] [Hint #2]