Tuesday, December 22, 2009

Scroogenomics? The Economics of Holiday Giftgiving

Joel Waldfogel once again pops up at the holidays to tell everyone why they should be giving cash for holiday gifts, after all he is an economist and knows everything, right? [He is also hawking his book "Scroogenomics" as he ties his tired gift giving schtick to the "-onomics" craze in publishing - hopefully Beerononmics will be the next big -onomics book, once I get around to writing it] Here is his entire book in a nutshell: cash lets you buy exactly what you want so it optimizes the value of gift giving. There, I just saved you $10.

The problem is of course that we get pleasure from giving and receiving gifts, but less so with cash. So when he says, 'well if you like giving gifts, give cash and then I will be able to get just the thing I want, and you get your pleasure and I maximize my utility from consumption,' he is assuming the pleasure from giving cash is the same as the pleasure from giving a gift in kind. Which it isn't. How do I know? Few people do it. In economics we call this revealed preference.

What astonishes me is that Waldfogel misses this most important aspect of the holiday gift giving equilibrium and in so doing exposes the worst of economics: if people's utility from gift giving and receiving were lower than the additional value a gift receiver gets from getting cash, we would have long ago resorted to cash giving. But we haven't and there is no outside force prevent this behavior, so the outcome speaks for itself: people like to give and receive gifts in kind, not cash.

Why this represents the worst of economics is that this type of logic - assuming everyone is deluded and irrational and it takes a smart economist to help them out - is not only insulting, but precisely what we teach our students not to do in social science. The equilibrium speaks for itself, the task is to uncover the mechanism or incentives that lead to the equilibrium.

I think the only way to justify this assertion is through a prisoners dilemma game in which, by acting in our own self-interest, we reach a sub-optimal equilibrium. But what about shopping for and giving a gift in kind is self-interested? Surely cash is simpler and easier. So, no, I think he has it all wrong and instead of calling it the deadweight loss of Christmas, he should call it the lower bound on the value of the utility we get from holiday gift giving. So give away and enjoy - you have this economist's blessings.

Happy Holidays.


M said...

I don't know if I would prefer a gift in kind or cash of the same value, but people certainly love giving payments in kind. Cash would do me a lot better than food stamps, but government loves to promote its cheese. Is gift giving a natural extension of our paternalism?

Jeff Alworth said...

I don't know if he touches on this, but there is another factor in gift-giving: information. Let's say you're an old fogey who listens to, oh, I don't know--Camper Van Beethoven. You want to listen to some new music, but, well, the last CD you bought was Bleach by Nirvana back in '93. I could give you a $25 iTunes card and let you fend for yourself, or I could go get you some Grizzly Bear.

Seems like Waldfogel's premise depends on a certain knowledge threshold that doesn't exactly line up with most people's experience. (Though maybe Waldfogel is a Grizzly Bear man from way back.)