By Prashansa Srivastava
Economics has long been known as a dismal science. However, one would think that when it comes to exchanging gifts during the festive season, not even an economist would have any reason to complain. The healthy effect of spending on the macroeconomy is bound to raise hopes of anyone concerned with India’s slumping growth rate.
According to a study conducted last year by ASSOCHAM, a cheerful economy leads Indian consumers during Diwali to spend over Rs 25,000 crore (Rs 250 billion) on festive shopping. However, according to economist Joel Waldfogel, the gifts being exchanged and bought might just be a colossal economic waste.
The deadweight loss of celebration?
In 1993, Waldfogel coined the “deadweight loss of Christmas” theory in a paper published in the American Economic Review. Although one could argue that there are significant differences in celebratory norms and practices when it comes to Christmas and Diwali. Diwali involves purchasing new clothes, special food items, jewellery, decorations etc. In addition to these, it also involves some gift exchanging between family members, friends and casual acquaintances. The deadweight loss can thus be defined for any holiday involving such an exchange of gifts and can be understood as the waste that arises from people making choices for other people.
Deadweight loss is the loss to one party which is not offset by a gain to another party. Waldfogel estimated that ill-chosen gifts caused between $4 billion and $13 billion a year in economic waste. For comparison, he cited an estimate that put economic costs of income tax at $50 billion. This loss arises when gifts are mismatched with the recipients preference due to consumers making decisions on behalf of others. Normally when you as a consumer are given Rs 1000 you will buy something that is worth at least Rs 1000 to you. However, when tasked to buy a Diwali gift with the same amount you could end up buying something worthless.
Cash or no gift?
Waldfogels paper highlights the importance of consumer preference and is based on the most fundamental idea of economics, that individuals are best suited to make their own decisions. This is not a stance against spending but a stance against spending that fails to produce the requisite amount of satisfaction. Since Waldfogels paper there has been a significant contribution to this literature by Waldfogel himself and many other economists such as Solnick & Hemenway, List & Shogren, Ruffle and Tykocinski among others.
This rejection of a sentimental and long holding tradition for the triumph of individual choice might just be an economists dream. Waldfogel, who went on to write a book called Scroogenomics: Why You Shouldnt Buy Presents for the Holidays, suggests usage of cold hard cash or gift vouchers to minimize this wanton wastefulness of gift giving. So, should economists advocate an end to gift-giving or at least press for money to become the gifting norm?
The economics of happiness
Many economists believe that gift giving is more than a simple economic exchange, involving reciprocity and emotional value. In 2015, members of the IGM Experts Panel at the University of Chicago Booth School of Business overwhelmingly defended gift-giving as an efficient way for people to show that they care about each other. David Autor of M.I.T. pointed to revealed preference: If people give and receive so many gifts, its presumably because it makes them happy. Alberto Alesina of Harvard said choosing a gift is a signal of the intensity of search effort.
Another important aspect most often ignored is that the value of the gift is more than the worth of the gifted item itself. A gift’s worth is thus not only a function of the price of the gift, but also of the giver and the circumstances in which it is given. Moreover, gift-giving can not only add value to the recipient but to the giver as well.
It’s the thought that counts right?
Moreover, not all presents are bad value for money. Depending on how good people are at anticipating what others want, the lower will be the deadweight loss of the gift and higher will be the efficiency. People who are in close contact with recipients usually do a very good job when it comes to choosing presents. Unsurprisingly, the most efficient gifts (those with the smallest deadweight loss) come from close friends and relations. Extended family relations such as aunts and uncles (or others who are only in occasional contact with the beneficiaries of their festive generosity) tend to give least efficient gifts.
So, before you consume that box of sweets, evaluate whether it matches your preferences. If it doesnt, remember what economists have studied long and hard to reassure you- its the thought that counts.
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