December 5, 2007 — Say It with … Cash?

Economic theory suggests that money is the best gift, but there are plenty of reasons why we still put presents under the tree
By Ernie Siciliano

The average American will spend an estimated $859 on gifts for friends and loved ones this holiday season. Depending on which economist you talk to, however, as much as $286 of that spending may be wasted — or not.

In his oft-quoted 1993 study, economist Joel Waldfogel at the University of Pennsylvania concluded that between one-tenth and one-third of the value of holiday gifts is lost. That's because recipients might not value their gifts as highly as they were priced. The difference between the cost of the gift and the lower value that recipients place on it represents "deadweight loss," otherwise known as the waste from economic inefficiency.

Let's say you received a $399 iPhone for Christmas but were perfectly happy with your BlackBerry. While you have a new gadget to play with, you probably would have been more satisfied with the money or $399 worth of other goods that you valued equally.

Waldfogel's findings have been challenged by other researchers. Their studies concluded that gifts may satisfy recipients in other ways. Maybe you wouldn't have bought the iPhone, but after a quick test-drive you decide that it's actually better than your BlackBerry. Or, perhaps you were touched that your friend deemed you worthy of such an expensive gift. Remember the adage, "It's the thought that counts."

That's what University of Vermont economist Sara Solnick and Harvard economist David Hemenway argue in their response to Waldfogel.

"Value is created by many pathways," the economists wrote in a 1996 paper. "For example, the recipient respects the tastes of the giver, or the item is something the recipient never remembers to get. … We believe that social aspects of gifts are often responsible for the value created by gift exchange in the real world."

Solnick and Hemenway did not find a deadweight loss from gift giving. Instead, they found that recipients get 11 percent in "utility" — a measure of satisfaction — above the cost of the median present.

Gifts that were considered thoughtful were generally valued the highest. About 68 percent of unrequested gifts were considered to have "a lot of thought," as opposed to 38 percent of all requested gifts. (This may help explain why pre-paid gift cards so often go unused — because they require so little thought on the part of the giver, and thus may not be valued as highly by recipients.)

What accounts for the different results of these two studies? Solnick and Hemenway took random samples at train stations and airports in Boston and Philadelphia as well as surveyed Harvard graduate students and staff. Waldfogel's sample was more homogeneous: Yale University students who tend to be richer, more intelligent, and younger than the general population.

More important, all of Waldfogel's subjects were economics students. Since microeconomic theory teaches that cash may be better than a gift of equal value, Solnick and Hemenway argue that Waldfogel's students were predisposed to accepting cash.

Indeed, gift giving assumes various roles in our society. University of Virginia sociologist Theodore Caplow found that almost all of monetary gifts within families were from one generation to a lower generation. For example, half of all gifts from grandparents to their grandchildren were cash.

This suggests that in certain situations cash gifts are appropriate. In other contexts, however, they are completely shunned. A 1983 study in Britain found that most young adults considered a gift of money to their mothers inferior to an actual present. In a follow-up survey, mothers agreed that they did not appreciate cash as much as a present.

Colin Camerer, a business economics professor at the California Institute of Technology, summed it up best in a 1988 paper: "The inefficiency of conventional gift giving is the price one pays for communicating in a common language."

Joel Waldfogel's "Yuletide Economics Page"

Caplow, Theodore. "Christmas Gifts and Kin Networks." American Sociological Review, June 1982, vol. 47, no. 3, pp. 383-392.