Christmas is the season to be merry, the time for giving and sharing, the time for family and the time to celebrate life.
In the midst of the joy, economists have been analysing the economics of Christmas for decades. In a paper titled 'The Deadweight Loss of Christmas', Joel Waldfogel economically criticises the customary tradition of gift giving as a waste (economic inefficiency).
Waldfogel's research focuses on the economics of giving gifts in the holidays and his research findings indicate that the mismatch between what someone wants for Christmas and what they are actually given causes a serious deadweight loss to the economy.
In his book Scroogenomics: Why You Shouldn't Buy Gifts For The Holidays (appear to be named after Uncle Scrooge, the biggest miser ever), Waldfogel discourages people from buying gifts for their loved ones, emphasising that the money we spend on our gifts provide less value to the recipients of these gifts, especially if we do not know them very well.
His research findings indicated that of the US$65 billion spent on gifts in the United States in 2009, about 20 per cent was deadweight loss.
What is the deadweight loss of Christmas?
In an exclusive interview with Paul Solman, Waldfogel outlined that the deadweight loss of Christmas is the waste that arises when people try to make decisions on behalf of other people.
He stated that when individuals spend money on themselves: for example, you spend a $100; you buy something that values $100 to you, but when you spend $100 on a gift for someone, the gift can value nothing to them.
The term deadweight loss in economics means waste; it is a loss to one person that does not result in a gain by another.
The $100 loss to you does not result in $100 gain to the person who you purchase the gift for, if they do not like the gift. If, on the other hand, you give the person the money instead of trying to choose for them, then it is not deadweight loss since the $100 loss to you is a $100 gain to them.
Are there any exceptions?
Waldfogel agrees that people who know each other well usually do a good job at minimising any deadweight loss that might arise through gift purchasing. Parents buy needed gifts for their children, spouses buy good gifts for their significant other, and friends buy reasonably well for each other, so there is no deadweight loss arising here and no problem to be solved.
The problem arises when you do not know the person for whom you are buying the gift very well and you have to guess what they would like.
According to Waldfogel, this situation presents a severe deadweight loss issue, as a significant portion of these gifts go unused.
What is the solution?
Waldfogel recommends gift cards as a plausible solution to the problems arising from gift purchase mismatch. Though not his personal solution, he sees giving gift cards as the market solution, as it gives the recipients the option to redeem these for whatever they like. Hence reducing or eliminating any deadweight loss that may occur.
Cash is also a credible solution to the problem, especially for teenagers who like to make their own choices.
What is my take on the issue?
There is some sense to Waldfogel's premise. Personally, I have received gifts in the past that I don't like, or gifts that serve no purpose to me whatsoever, which I will never end up using, and I know I am not alone. Many of us have found ourselves in this position before.
There is a feeling of joy and fulfilment generated from the act of giving that everyone should try to experience; it feels good to be kind.
What is not good is when you want to give and you don't know what the person likes and you end up giving them rubbish. Don't be afraid to ask them or somebody close to them what they would like as a gift; if in doubt, give cash.
In these tough economic times, I doubt anyone would refuse cash. Furthermore, giving cash allows the recipient to purchase the things they need the most, which makes them more grateful to you for your kindness.
Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email firstname.lastname@example.org.