Scroogenomics vs Ulterior Motives (and Other Justifications for Gift Giving)

Thursday, December 31, 2009
By dreeves

scrooge vs santa

As a poser economist (as Jeff Ely calls me), I love to complain about the social inefficiency of gift giving. It’s a terrible idea, guys! We waste 13 billion dollars a year on it! [1] But I do appreciate that I have a tendency to pooh-pooh social conventions far too blithely. Nonetheless, social conventions change. Drastically so, given enough time. As Al Roth points out, wedding registries, gift receipts, and, more regrettably, gift cards represent a shift towards cash as gifts, and thus greater efficiency.

But as much as I applaud this trend and agree that holiday gift giving makes us all poorer and generally worse off, I’m sure Joel Waldfogel’s estimate (that the value we get from gifts is 25 cents on the dollar) is overblown. So, in the spirit of the holiday season, here are some reasons why gift giving isn’t quite so bad as it seems:

  1. Ulterior Motives. When put that way it doesn’t exactly sound holiday spirited but I think ulterior motives is the most overlooked and perhaps most legitimate justification for gift giving. If I give you a ticket to see a show with me because I really want to see it with you, then it really doesn’t matter how much you would’ve paid for that ticket yourself. I wanted your company and this is a socially acceptable way for me to pay for it. [2] Homer Simpson giving Marge a bowling ball (or a power screwdriver or somesuch) is another example. Nothing’s wasted if Homer gets enough use out of those gifts himself! A more common example is giving one’s girlfriend lingerie. But the ulterior motives need not be selfish, exactly. It might well be socially efficient for me to buy you a book you wouldn’t have bought, if I have a lot of value for discussing it with you.
  2. Signaling Value. I don’t pretend to understand the intricacies of this, but presumably it’s socially useful to prove our thoughtfulness. We may also find it socially valuable to be mutually indebted to each other (and in ways hard to quantify).
  3. The Ritual. The process itself may have value to us, including the process of figuring out each other’s desires well enough to buy gifts.
  4. Extrospection. In rare cases you might actually know the recipient’s utility function better than they do. Usually this is ill-advised, from an efficiency standpoint. Why not just recommend your new favorite music to your friend and let them decide whether to buy it? The one case where extrospection is a slam dunk, of course, is giving gifts to small children (all the other excuses for gift giving — except perhaps number 2 — also apply in this case).
  5. Transactional Efficiency. Related to number 4, it may be easier for you to get your friend something than it is for them to get it. Maybe you’re buying a book for yourself and it’s just as easy to get a second copy. Or you may have access to something the recipient doesn’t — for example, if you’re visiting a foreign country.

The last two don’t really count, of course, since Waldfogel’s analysis accounts for those. But the first three may put a legitimate dent in that 13 billion dollar deadweight loss.

Added: Vincent Conitzer adds a great one in the comments:

  1. Plausible Deniability. There are some things that you just have embarrassingly high utility for. And “hey, it was a gift!” can be a nice airtight excuse.


Addendum 2010

Here’s a cool infographic from WePay making similar points: Holiday Misgivings.


Addendum 2011

Jake Hofman points out two interesting articles on gift-giving: Do Not Buy Dad a Tie by Matthew Yglesias does a nice job of explaining the dead-weight loss of gift-giving and offers some economically sound advice. And this article has some lessons on the psychology of gift-giving.


Addendum 2012

Looks like technology is coming to the rescue. Check out Amazon’s plan to let you short-circuit the process of returning and exchanging gifts. HT: Cody Stumpo.



[1] That’s not a claim that we spend $13B/year on gifts. We spend 17 billion, 13 billion of which is pure waste. That’s Joel Waldfogel’s estimate of the difference between what we spend on holiday gifts and what the recipients would have been willing to spend to buy those items themselves.

[2] Alright, it sounds much ickier when you put it that way!

Thanks to Alex Strehl, Eleanor Strehl, David Reiley, Jill Sazama, Bethany Soule, and Sharad Goel for helpful discussion.

Illustration by Kelly Savage

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  • Jeff Ely

    dear dan:

    of all the poser economists, you are my second-favorite. Let’s pose together sometime. Happy new year.


  • Vincent Conitzer

    I think 2 (signaling value) is the big one, proving one’s ability to empathize with the recipient (as well as proving effort spent on trying to empathize, which presumably has other long-term benefits for the relationship). This also explains why cash and gift cards are often seen as “bad” presents — while you get $1 or $.99 of value for the dollar, it doesn’t show that you understand the other’s desires and needs.

    Another one: sometimes you can give someone something that he will enjoy but would have been embarrassed to get for himself. E.g., if Homer buys a bowling ball for himself (not as a gift), this sends a signal to others that he cares more about bowling than about his family — a signal he may be reluctant to send. However, if Marge buys Homer a bowling ball, Homer is “off the hook” — he couldn’t help getting the bowling ball, plus there is a signal that Marge thinks Homer is a good father who deserves a break, which is part of the present.

  • dreeves

    Other inefficiencies of the season…

    Sharad pointed out that “after-Christmas sale” is a euphemism for “pre-Christmas price-gouging.” This is not an inefficiency if you include the utility of the retailers but from consumers’ perspective, it’s inefficient to concentrate demand around a single day of the year. Bah humbug!

    I recently encountered an inefficiency related to holiday travel. Many outbound NYC flights were canceled the weekend before Christmas due to a snowstorm. People were generally rebooked a few days later. But on Monday everything was back to normal. I know because I flew out of New York on Monday. My aunt was supposed to fly out on Saturday but got stranded until Tuesday. She clearly wanted to depart on Monday more than we did. It’s a shame that there’s essentially no secondary market for airline tickets! (Though there is in a very limited sense: You can volunteer to be bumped and the airline will compensate you with travel vouchers, worth deceptively little. But naturally the airlines are not bumping willing travelers in order to rebook people sooner when their original flights were canceled.)

  • David Rutter

    “the difference between what we spend on holiday gifts and what the recipients would have been willing to spend to buy those items themselves.” This probably falls into #4 or #5, but there are situations where you know someone (perhaps due to income inequality or perhaps due to general stinginess) is incapable of paying as much as they might value it, and because of this, think they value it less (let us not become emotionally attached to things we might want but can’t have). In particular, you know they’ll love it, but also know they would never buy it.