The economics of gift giving

The Christmas gift giving economy is huge with people in the UK expected to spend £20.1bn on Christmas gifts in 2022 (Thats around £430 per person). However, new data from the ONS suggests we households are buying fewer (and less expensive) presents this Christmas driven by the cost of living crisis. 60% of people say they have cut back on their Christmas spending. With this in mind, I thought I would take a bit of time this Christmas eve to reflect on the economics of gift giving and to wonder if it is all worth it.

The inefficiencies of gift giving

In an infamous (in economics circles at least) book published by Joel Waldfogel in 2009, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays’. Waldfogel gets into why gift giving is fundamentally inefficient. The theory goes a little something like this:

• There is fundamentally a gap between how much you value the present you receive and what you would have valued the next best alternative at if you could have spent that money. For example, if you get a book that you’ve already read, but with that £10 you would have bought yourself a new hat — there is an inefficiency. This is known as a ‘deadweight loss’. What is causing it is ‘Asymmetric information’ between yourself and the gift giver — who might not know what you want. Waldfogel estimated this loss at around $12 billion in 2007.
• There are additional hidden costs to gift giving: Spending time shopping, buying wrapping paper etc. Time and resources which could have been spent on other things — these are known as opportunity costs.
• His solution is that broadly you should just give cash. Cash removes any issues around asymmetric information and allows for people to match spending to their own preferences.

Apart from the scroogey nature of this theory, something feels lacking. I have 3 criticisms (as someone who has only recently hopped on the gift train):

Cash gifts are unlikely to stimulate the economy

• If I gave £100 as a gift and received a £100 as a present, I am unlikely to actually spend the money on fun and exciting things. It’s more likely to go into savings, rent or bills. Whilst this is arguably improving efficiency, it would suck money out of the economy. One way around this would be gift cards. However, gift cards are fundamentally extremely inefficient — the Gift Card association estimates every year around £300m is left unspent in gift cards that have been lost or forgotten about. In addition, since the start of the pandemic, 7% of people in the UK have found themselves with a voucher for a retailer that’s gone bust. And almost two-fifths of these consumers were unable to spend the full balance of their voucher. I still don’t like gift lists (excluding weddings) as a solution either — A true gift is one that can’t be asked for: It must be given.

The happiness of gift giving

• What Waldfogel fails to account for in his study, although mentions it briefly, is the happiness of gift giving. Michael Norton conducted a series of studies at Harvard which tested just this. The most famous study gave people money to spend, half the group spent it on themselves, whilst half spent it on others. The findings showed that those who reported spending on others (including charities), what the team called “prosocial” spending, also reported a greater level of happiness. On the other hand, spending on yourself was consistent with almost no change in happiness. Whilst difficult to monetise, the value of this may outweigh any inefficiencies.

Building trust and relationships

• One final reason is the history of gift giving may be tied to some sort of peace offering. Primal civilisations gave gifts, often as a way of building social networks, establishing dominance, and starting families. It often came at the sacrifice of present consumption for a future benefit of prosperity. I am not trying to argue we still use the same reasons now. However gift giving probably is, despite its costs, used to maintain and strengthen social networks — even if we don’t openly acknowledge it.

In the end, all it really proves is that you can write a book about anything.

Merry Christmas and speak in the new year,

Shiv