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Friday, December 25, 2009

"We do what we must, and call it by the best names." - Ralph Waldo Emerson

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The Deadweight Loss of Christmas

"A potentially important microeconomic aspect of gift-giving is that gifts may be mismatched with the recipients' preferences. In the standard microeconomic framework of consumer choice, the best a gift-giver can do with, say, $10 is to duplicate the choice that the recipient would have made. While it is possible for a giver to choose a gift which the recipient ultimately values above its price-for example, if the recipient is not perfectly informed-it is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash. In short, gift-giving is a potential source of deadweight loss.

This paper gives estimates of the deadweight loss of holiday gift-giving based on surveys given to Yale undergraduates. I find that holiday gift-giving destroys between 10 percent and a third of the value of gifts... Holiday expenditures average $40 billion per year, implying that a conservative estimate of the deadweight loss of Christmas is a tenth as large as estimates of the deadweight loss of income taxation... gifts from friends and "significant others" are most efficient, while noncash gifts from members of the extended family are least efficient and destroy a third of their value. I develop a simple expected-utility model to explain the decision to give cash, as opposed to in-kind gifts. The data are consistent with the model: cash gifts are most common from the sorts of givers whose noncash gifts have the lowest expected value to recipients (given their cost) and high variability in recipient valuation...

However, if recipients are imperfectly informed, the giver may be able to choose a gift that the recipient would not have chosen but which makes the recipient better off than a cash amount equal to the cost of the gift. In this case, it is possible for a gift to create, rather than destroy, value. The better the giver knows the recipient's preferences-including, possibly, preferences the recipient is unaware of-the more likely it is that the giver will choose a gift that the recipient values above its cost and will thereby create value through giving...

Aunt/uncle and grandparent gifts have by far the lowest yields (among noncash gifts) at 64.4 percent (SE = 7.0 percent) and 62.9 percent (10.3 percent). Gifts from friends and significant others have the highest average yields, of 98.8 percent (SE = 14.7 percent) and 91.7 percent (SE = 8.3 percent), respectively. The average yield of parent and sibling gifts is about 85 percent (with standard errors of 3-5 percent)...

Government grants in kind are often criticized, on theoretical grounds, for value-destruction. There is little existing research on the fraction of value destroyed by such programs, but it is interesting to compare the available evidence on government value-destruction... food stamps and rent supplements, which most resemble cash, generate no deadweight loss, while the deadweight losses for public housing, Medicare, and Medicaid are between 9 percent and 39 percent"


Friends know you better than significant others?!
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