Wednesday, December 20, 2006

The value of gifts 

Christmas always seems to bring out the articles about some Scrooge-like economist who says giving gifts destroys value. Joel Waldfogel had to wear that crown for awhile, in return for a high-visibility publication that argued gifts destroyed 10-35% of the value of the money spent on them. Jonathan Chait seems to have picked this strand up, arguing yesterday in The New Republic that the destruction could be much greater:
Christmas spawns industries devoted to useless goods like fruitcake and flavored popcorn. More commonly, it forces us to pay for things we like, but whose cost exceeds their worth to us. Suppose a box of chocolates costs $15. I don't buy chocolates for myself, because they're worth only $5 to me. You choose not to buy $15 cologne because it's worth only $5 to you. Swapping chocolates for cologne penalizes each of us $10. Yes, sometimes you can buy somebody a gift he would buy for himself. But the more likely this is, the higher the likelihood that he actually has it already. OK, so gifts detract from our material welfare. But, you point out, they still provide psychological benefits--goodwill, etc.--beyond their tangible value. The problem is, you can use that argument to preserve any inefficient practice.
Chris Dillow syas the result somewhat depends on the way one asks the question of what is the value. I tend to take the side, though, that the value of the gift to the giver is what is of importance in explaining gift-giving. Waldfogel's later article reminds us in its conclusion that gift-giving could be a means for the giver to demonstrate how keenly they know the recipient's preferences, or be a means to induce a stronger relationship between the two, or otherwise provide social signals. (It might also be that the giver has some unique ability to find things for giving, but that's unlikely to be a reason why gift-giving is prevalent.) Imagine the chocolate-cologne exchange to be between husband and wife: How possible is it for one to say to the other "Let's not destroy $20. Skip giving gifts this year." It becomes a prisoner's dilemma of sorts -- if you abide the agreement and your mate does not, you lose perhaps more than the destroyed value of the gift you purchase for him or her.

I remind one, then, of the value of cash. I have taught monetary theory using Waldfogel as an example for the value of money as a medium of exchange. My parents like to go out to eat but tend to be rather cheap. Thus a gift certificate to a restaurant (but not an expired one to the Cheesecake Factory like that Chait tried to fob off on his girlfriend as a re-gift) provides the most likely means of not destroying value, while demonstrating that I care about them having time out together as a couple.

My wife has solved the problem by identifying only two gift types she will be happy to receive from me at any time -- perfume and jewelry. My pastor sends his siblings animals from the Heifer Project. Etc. In a repeated game of reciprocal gifting, there will be agreements made in the name of family tradition that reduce the welfare loss of Christmas.

It appears my youngest niece -- a few months older than Littlest Scholar -- has understood the theory. I got a note from my brother last week notifying me that she had "researched all the different gift cards on the Internet" for finance charges, wide use, and lack of expiration -- she wishes to avoid gifts that become seigniorage -- and concluded the American Express card would be just dandy, thanks. One could hardly say no. Yet my brother had also told me, the month before, that he had seen his daughter on the award stand for a cross-country race proudly wearing a track suit I had purchased for her the year before. Did she think of her uncle at that time? If so, that would have generated real value to me. If it's more blessed to give than it is to receive, it's not least because I only have control over the first activity.