Thursday, December 24, 2015

Econ: Gift-giving and deadweight loss

From Real Time Economics:

The Best and Worst Gifts and Gift-Givers, According to Economics
If you find a musical instrument or kitchen gadget under the Christmas tree this year, you might well be disappointed. And if you don’t like your gift from your girlfriend, you’re not alone.
We recently explored the economics of gift-giving—a realm in which economists don’t exactly practice what they preach (they all give gifts).

The article noted that some gifts are valued more highly than others, and that some gift-givers seem to be better than others. As a service to readers, this is a more complete breakdown of that data from Kristine Principe at Niagara University and Joseph Eisenhauer, now at the University of Detroit, Mercy, in their 2009 paper in the Journal of Socio-Economics.
Pets appear to be the worst gifts. Travel, the best. The recipients of jewelry and computers seem pretty happy, too. Now take those results with caution—the number of respondents getting such gifts in the survey were small and results could be a fluke (results where this is a possibility are in light blue in the chart). Other dud gifts: accessories, books and musical instruments. Even gift cards aren’t as good as cash (“I’m a college freshman now, Mom, I don’t want an Abercrombie gift certificate anymore.”).

To obtain these results, Ms. Principe and Mr. Eisenhauer surveyed students in undergraduate principles of economics classes. In the first weeks of the semester, following the winter break, they had the students describe the gifts they had received as carefully as possible. Then they asked the students how much money they would be willing to accept in exchange for the same gift (ignoring the sentimental value). That is, would they be just as happy with $10 as with this sweater?

If the student would rather have a $10 bill, but someone spent $30 on the sweater, it’s an inefficient gift. The recipient would have been just as happy with the $10, so in effect, the other $20 of wealth was destroyed. This insight is why many economics consider gifts “an orgy of wealth destruction.”...