Why $182 Isn't the Best Gift For the Holidays

"Deadweight Loss" is a real risk, but trial and error in gift-giving may be a better outcome this holiday season.

Americans will spend $328 billion this year on gifts for family friends, according to National Retail Federation estimates.

That seems like a healthy indicator of the U.S. economy. Except economist Mark Perry points out that if deadweight losses are to be calculated, between $33 billion and $118 billion of that spending will be wasted.

In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given. Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift. In reality, it’s highly likely that many gifts given will not perfectly match the recipients’ preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the giver than if the recipient was given cash and allowed to choose his or her own gift. Because many gifts are mismatched with the preferences of the recipients, the author concludes that holiday gift-giving generates an economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts.

But, and it's a big BUT, Perry points out that, perhaps some of that waste serves another purpose. He uses an instructional episode of Seinfeld to suggest that "there might be a cost to giving cash that Waldfogel’s model didn’t consider."

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