Although that strategy didn’t work out so well for Jerry Seinfeld….

It’s that time of year for my annual post on the “deadweight loss of holiday gift-giving.”

1. Economist Steven Landsburg writing in his book the “Armchair Economist: Economics and Everyday Experience“:

 I am not sure why people give each other store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.

2. In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given. Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift. In reality, it’s highly certain that many gifts given will not perfectly match the recipient’s own personal tastes and preferences, or it might be the wrong size, color, or style. 

In those cases, the recipient will be worse off with the sub-optimal gift selected by the gift-giver than if the recipient was given cash and allowed to choose his or her own gift. Because many Christmas/holiday gifts are mismatched with the preferences of the recipients, Waldfogel concludes that holiday gift-giving generates a significant economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts purchased.

3. The National Retail Federation estimates that Americans will spend about $730 billion this year during the holiday season. If the deadweight loss estimates of Professor Waldfogel are accurate, that would mean that between $73 billion and $243 billion of the spending on gifts this holiday season will be wasted.

4. Amazingly, 77% of consumers plan to return some of their gifts this year and nearly 20% expect to return more than half of their gifts, according to a survey by Oracle of 15,800 consumers, as reported by CNBC. That’s pretty strong evidence of the significant amount of mis-match in holidy gift giving, which imposes a huge cost on the gift recipient in terms of time spent returning and replacing their poorly chosen gifts!

5. In the Seinfeld episode above, Jerry thinks like an economist and tries to avoid the deadweight loss by giving his close friend Elaine a beautifully gift-wrapped package that contains $182 in cash for her birthday. Watch as Jerry’s economic thinking about giving a cash gift backfires, suggesting that there might be a cost to giving cash as a gift that Professor Waldfogel’s model didn’t consider.

Merry Christmas/Happy Holidays! Hope you have a Cool Yule!

The post Holiday shopping? Consider the most economically efficient gift of all: cash, and avoid the deadweight loss of Christmas appeared first on American Enterprise Institute – AEI.