With the holiday season in full swing, you may find yourself dealing with the impossible task of buying everyone the exact present they desire.
Lucky for you, your friendly neighborhood economist is here to help you identify the best – possibly even optimal – gift for everyone.
Yes, that’s right: one gift that is perfect for everyone.
You may find it unlikely that I, a mere mortal economist who failed to predict the Great Recession, could possibly know the needs of everyone on your shopping list, but that is exactly what I am claiming. With a little help from economic theory, of course.
So, to great fanfare, here it is: The gift you should give everyone this holiday season is… cold, hard cash!
Really. No need to spend hours fighting through crowds and waiting in lines. No need to wonder about someone’s size or preferred color. No need to find a box to wrap your wonky-shaped gift. All of your shopping can be done at the bank, or ATM if you prefer.
The argument for the card-with-money-it approach is well-summarized in “The Deadweight Loss of Christmas”, an article by economist Joel Waldfogel (sorry, not a Hallmark movie) that was published by the American Economic Review in 1993. This article enlightened my gift-giving philosophy, and in the spirit of the holidays, I want to share its wisdom with you.
Suppose that you, as a gift giver, have $20 to spend on a gift for a good friend. Optimally, you would be able to put yourself in your friend’s shoes and purchase the item that he or she most wants for $20. In this scenario, the best you can hope for is to “duplicate the choice of the recipient.”
What is more likely is that your friend will value the gift at an amount below its price. Even though you spent $20 on the gift, your friend may only value it at $15. This is the source of gift-giving’s “deadweight loss.”
While Dr. Waldfogel concedes that your friend could value the gift more than its price, he argues that, more often than not, recipients are happier choosing how to spend the $20 themselves than having someone else choose an item for them.
Based on Dr. Waldfogel’s econometric methods, the estimated deadweight loss of holiday gift giving is “between a tenth and a third of the value of holiday gifts.” On the other hand, the only way for $20 to lose a fraction of itself is if your friend is an over-enthusiastic card opener.
So the next time you find yourself at a loss for the perfect gift idea, don’t feel bad about filling someone’s stocking with a nice wad of cash. Not only will you be making the holidays more efficient, you’ll also lighten the load of Santa’s sleigh.
Meet the Author
Jeremy Jackson is the director of the Center for the Study of Public Choice and Private Enterprise (PCPE) and an associate professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.