Leave it to an economist to estimate the deadweight loss of Christmas. In a 1993 American Economic Review article (copy available here), economist Joel Waldfogel estimates that gift-giving destroys between 10 percent and one third of the value of gifts. What's the source of the deadweight loss? Well, anyone who has ever received a really lousy gift should be able to relate. The cost of the gift is often greater than the value placed on the gift by the recipient. Remember that $50 sweater you received that you wouldn't have paid 10 bucks for? That's value destruction in action.
The growing phenomenon of gift card presents helps reduce the deadweight loss, but it doesn't totally eliminate it. First, you occasionally receive cards to merchants of little interest so you don't spend them. Second, people often do not fully expend the amounts on gift cards. These two factors create the value destruction. In a recent Journal of Economic Perspectives article, economist Jennifer Pate Offenberg estimates a 15% loss on gift cards by studying their resale value on eBay. The best cards for holding their value include Home Depot, Lowes, Office Max, Circuit City, and Starbucks. The worst include Tiffany & Co, Victoria's Secret, Abercrombie & Fitch, American Eagle, and Express.
Be an economist this Christmas - just give cash!
. . . This is probably the stupidest article ever to appear in the AER.
ReplyDeleteThe author apparently never heard of the principal of "revealed preference." Deadweight losses come from gov't restrictions on free exchange, not from voluntarily adopted institutional arrangements.
Does he really think that my welfare would be higher if my family spent Xmas morning exchanging envelopes of cash?
"Gee, thanks kids for that $2. Now I can get something I REALLY want, instead of that stupid coffee mug you were going to give me."
The anonymous person above wrote, "Deadweight losses come from gov't restrictions on free exchange, not from voluntarily adopted institutional arrangements." This is wrong. They obviously don't know about the DWL form monopoly or cartels, etc. DWL is anytime there is a direct measurable loss of quantity from a market. If gifts are tossed in the trash or gift cards remain unredeemed, there is a DWL. Read any intermediate economics textbook.
ReplyDeleteWow, I don't know what microeconomics texts you have been reading, but if a gift card is tossed in the trash or discarded, there is a (weakly) lower deadweight loss than if it were actually used. The only deadweight loss associated with a discarded card is the cost of producing the card; the price paid, net of that cost is a transfer, not a deadweight loss.
ReplyDelete