01 July 2010

The deadweight loss of gifts

Economists are famous for their bah humbug analysis of Christmas gifts. In one famous paper, "The deadweight loss of Christmas," Waldfogel pointed out [PDF] that the difference between the cost of gifts to givers and their value to receivers was significant. In other words, there was a "deadweight loss" (DWL) that could be eliminated by gifts of cash.

Most people reject this conclusions ("gifts are inefficient") because it fails to include the emotional dimension of gift giving. I agree that this component is far more important than the DWL.

Unfortunately, I was forced to invoke efficiency when I went to my good friend's wedding in Toronto. Without time or baggage space, I gave a card with a cash gift. Since the groom -- Henry, my ex-roommate -- was an economist, I made a joke about DWL.

Imagine my surprise, then, when it turned out that everyone else also gave cards with cash. It seemed that I ran into a different wedding gift culture. Nobody at the wedding was sure if that norm came from the Canadian or Asian aspect of the wedding, but it was pretty funny to me.

Bottom Line: Sometimes economists are wrong in their analysis, sometimes they are right, but the difference may be more a function of luck than analytical skill.

1 comment:

Bruce Ross said...

Cash -- it's always the right color and it's always the right size.