Monday, December 20th, 2010

The Value of Christmas Presents

Christmas is fast approaching. So it’s probably a good time to remind all of you that buying presents for your friends and family imposes a drag on the economy. If you really want to do good give cash instead.

This conclusion stems from research on consumer preferences by Joel Waldfogel, a professor of economics at the Wharton School of the University of Pennsylvania. Unsurprisingly perhaps, he is also the author of a book titled “Scroogeonomics.”

In the early 1990s, professor Waldfogel surveyed several hundred college students about gifts they received. He asked how much they thought the gifts cost and how much money they would demand to give the items up. He also asked the same thing about things people bought for themselves.

His conclusions: often people value presents less than what the presents cost to buy. Roughly, for each dollar spent people value gifts they get 20% less than things they buy themselves. If you are primed to strive for maximum social welfare, this will probably strike you as an unacceptable waste of resources.

Christmas presents needn’t be abolished altogether. These surveys leave out important human considerations. There is real value in the warm fuzzy feeling people get from knowing that the husband, parent or friend spent time and effort puzzling over the best present. This is not captured in survey questions about the value of the present. But the research does make a case against giving presents to people you don’t know well.

You can still give presents to kids without incurring severe economic costs. Their preferences are not as well established as those of adults. As long as it’s not a sweater they will probably like it just fine. Close friends and family, who know our preferences better, are also better equipped to give us something we would really like to have.

Then, of course, there are gift cards. According to the National Retail Federation, gift cards and certificates are the most popular type of Christmas present. A survey they commissioned found that 57 percent of consumers are considering giving one this year. They offer recipients a better chance of getting what they really want.

The problem with gift cards is that 10% are never redeemed. So for every $100 worth of gift cards people buy, they are actually giving a $10 present to the companies that issue them. This might make their shareholders happy but it might not work so well for our friends.

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