Christmas season and gifts go hand in hand, which is why Christmas is usually a peak selling season for retailers around the world. Around 25 percent of all personal spending takes place during the Christmas season. You might experience December as an expensive month, but then again, you will also probably receive gifts in return. Does this balance your expenses, or do you mostly feel you lost more than you gained during the Christmas season? Is the economy benefitting from buying all these gifts and does the thought put in gifts count? In this blog, some economics behind gift-giving will be explained. 

The Deadweight Loss of Gift-Giving

You would expect that gift-giving has a positive effect on the economy since people are spending their money. This is partly true because this counts for the macro-economy. Gift-giving can negatively attribute to the micro-economy. 

People know their preferences better than others do. So, it is not very likely that you will receive a gift that matches a hundred percent with your preferences. The gift will then leave you as a recipient worse off than if you made your own choice. Therefore, gift-giving is a potential source of deadweight loss. Even though the recipient may value the gift more than its price, it is more likely that the recipient will be left worse off than when he could have made his own consumption choice with the same amount of money. 

Holiday gift-giving destroys the value of gifts from ten percent to a third of their value. The deadweight loss of Christmas is a tenth as large as the deadweight loss of income taxation. 

This deadweight loss also depends on what kind of relationship there is between the giver and recipient. Gifts from significant others and friends are most efficient, while gifts from members of an extended family are least efficient and destroy a third of their value. 

The better the giver knows the preferences of the recipient, the more likely it is that the recipient values the gift above its cost and it will create value. 

Why Not Just Give Money?

According to this deadweight loss of gift-giving, you have to make gift-giving as efficient as possible. A way to minimize this loss of value is to give money. A recipient usually has some idea of the monetary value of the gift. Money has the same material utility to everyone. The recipient will value the gift the same as its price and can make his own consumption choice with this amount of money. From an economic perspective, the recipient should be satisfied with any amount because they end up richer than they were. 

Even though this is a good way to minimize the negative effect on the micro-economy, we rarely prefer to give money. Why is that?

Is Gift-Giving a Win-Win Situation?

‘A gift is a sale for zero’ is true according to strict monetary terms. But there is this fundamental law in economics that every voluntary transaction between people is subject to: it has to be a win-win situation. What both parties sacrifice is more than compensated by what they gain. 

If giving a gift is a win-win situation, the giver should experience some utility from giving something to the recipient. The utility is the perceived value of a good, referring to the satisfaction of the consumer of that good experience. The giver experiences a material loss, which, to result in a net gain, has to be compensated by the non-material utility. 

Most people expect to be paid for gifts as gratitude. Sometimes win-win situations do not occur when gift-givers make bad decisions because they simply do not know what the recipient wants.  But this is not always the case. The recipient can also establish a situation in which there is no win-win because he does not give the signals of gratitude that the giver expects. 

Does Thought and Effort Count?

Money is not the best gift because it does not contain any meaningful information. Arriving with an inappropriate gift, or even worse, empty-handed is usually avoided. The reason for this is that it will probably leave the reputation of the giver dented. When we give gifts, the thought and effort we put in matters. Choosing the wrong gift can be risky for a relationship because it shows that you have nothing in common. 

Even though recipients can well estimate the price of the gift, it does not always mean that if the gift was more expensive that they then enjoy it more. Recipients care most about how much value they are going to derive from a certain gift over a longer period of time. 

Conclusion

So, when we look from a purely economic perspective, gift-giving during the Christmas season is not the best way to boost the economy. Since often gifts do not match the recipient’s preferences a hundred percent, the value gets lost because the gift gets valued lower than its costs. According to this, giving money is the most efficient way because then the recipient can make his own consumption choice. But however, gift-giving is something we still do every year because it brings us gratitude from the recipient. Giving a meaningful gift that brings the recipient joy will give you as a giver a win-win situation. Less value gets lost when you very well know what the recipient wants, which is why it is good to have a clear wish list. Therefore, if you want to make sure you get exactly what you want this year and even help the economy a little, optimize your wish list. In this way, everybody will have a Merry Christmas.