With the holiday season beginning, we should consider the economics of gift giving. Let’s start with University of Pennsylvania Professor Joel Waldfogel who focused on receiving gifts. Then, through Duke’s Dan Ariely, we can look at how to give the best gifts.
Dr. Waldfogel’s research could make us decide not to buy any gifts. His basic conclusion was that when people express a value for a gift, the amount is usually less than the actual cost. By contrast, when they buy something for themselves the value soars. Empirically, he says that our own purchases generate on average 18% more value than purchases from others. You might enjoy looking at the survey (p. 17 of his paper) that he gave to 202 students.
Dan Ariely solves the dilemma by suggesting that we give gifts that people would feel guilty buying for themselves. As economists doing cost benefit analysis, we would say that guilt increases the cost side. By contrast, when the same item comes from someone else, because the recipient’s guilt disappears, cost diminishes. The result? Benefit exceeds cost.
The Economic Lesson
The loss in value to the gift giver and getter is called deadweight loss. Economists can draw deadweight loss on a demand and supply graph. For us now, though, just think of a loss in value as a cost.
Because value decreases for a gift, cost rises and everyone’s “pleasure” diminishes. The amount by which “pleasure” falls is the deadweight loss.