Posted by Eivind Tandberg
One of the sure signs that Christmas is approaching is that economic journals contain increasing numbers of references to the classic article by Joel Waldfogel: The Deadweight Loss of Christmas (American Economic Review, December 1993). In a discipline where attempts to combine rigorous analysis and humour are few and far between, this article stands out in many ways.
Waldfogel's paper uses stringent matematics and survey results to estimate the efficiency loss of Christmas present giving in the US. The deadweight loss arises because the recipient's valuation of the gifts may be significantly less than the actual cost of providing these presents. Waldfogel estimates this loss to be between 1/10 and 1/3 of the value of the gifts. In 1992 this loss amounted to between 4 and 13 Billion USD. In comparison, the deadweight loss of income taxation in the US at that time was estimated to be about 50 billion USD.
As interesting as the original paper, are the many other articles that have been inspired by it. If you google "Deadweight loss of Christmas" you will get a long list of different articles and blog postings. Some of these take issue with the thoretical foundation for Waldfogel's work, his research design or with technical details of the paper. Others are more concerned about the moral and societal implications.
Here are a few, random examples of articles based on Waldfogel's paper:
Ruffle and Tykocinski (2000) provide a detailed comparison of the findings in Waldfogel's paper and in a subsequent paper by Solnick and Hemenway (1996). The latter found that gift-giving actually results in a 214 percent welfare gain, a direct contradiction to Waldfogel's results. Ruffle and Tykocinski found that the results were significantly influenced by the wording of the question. Apparently, when recipients are asked which amount would leave them equally happy as receiving the gift, the amount is higher than when asked which amount would make them indifferent! The explanation is that the term "equally happy" probably puts respondents in a more cheerful or optimistic frame of mind than the cold, sterile "indifferent".
The website "In The Agora" suggests a number of explanations for why people engage in seemingly irrational gift-giving. It refers to three articles by the "Austrian School", which state that this behaviour cannot be irrational, otherwise people would not be doing it. One promising potential explanation is that the deadweight loss is compensated by the enjoyment of the giver, including such factors as "the joy of shopping". The posting is followed by a very lively debate on the topic.
A recent posting by David Bollier on the website "OnTheCommons.org" suggests that economists are a bit clueless when it comes to understanding value. While uncertain about whether Waldfogel "is an inspired humorist or simply obtuse, as many economists tend to be", he feels it is clear that the human meaning of gift-giving eludes him. He concludes that the article is a sesonal reminder of just how "autistic" conventional economic analysis truly is, and that no regression analysis or chi-square tests are required, just an open heart.
Finally, Tim Harford, the Undercover Economist, comments on the issue in an article from 2003, and indicates that gift giving is not the only example of seasonal waste. Sending of Christmas cards also leads to signficiant efficiency loss. "While some Christmas cards are sent out of genuine goodwill, many Christmas card exchanges are sub-optimal equilibria. In other words, both parties are only sending cards to reciprocate last year’s card. Both would happily agree to stop, but it is embarrassing to be the first after so many years of mechanical exchange."
Deadweight losses or not, the PFM blog wishes its readers: Happy Holidays!
