As noted by Chris Berg, the Australia Institute has rolled out its annual reminder of Joel Waldfogel’s almost 20-year old observation about the wastefulness of Christmas giving. As the gift giver has less than complete knowledge of the preferences of the recipient, the recipient tends to value the gift at less than the amount that the giver paid. The disparity in value represents a deadweight loss.
As for most of the annual responses to the Australia Institute’s release (with a special mention for Steven Kirchner’s 2009 comparison of Christmas gift giving with government spending), Berg suggests that such spending may not be wasteful. Christmas gifts signal to loved ones the strength of the relationship. To the giver, the money is not wasted. Further, the narrow definition of efficiency fails to capture benefits such as the effect of the gift on the strength of the relationship.
While I consider Berg’s analysis to be on the mark, I would not characterise the situation as one without “waste”. In fact, waste can be a vital element of the signal. For a signal to be reliable, there should a cost to the signaller. Otherwise, the signal may be faked. If gifts had no cost, people would give them to a far wider set of recipients, destroying the value of the signal to the receiver as to who cares about them. Receivers of the signal would then start to ignore the signals as they can’t tell the good from the bad. This makes gift giving useless to the signaller and destroys their incentive to make the signal in the first place.
This scenario creates an incentive for the giver to increase the cost (including price, inconvenience, degree of thought) of the gift to a size that cheaters will not match it. This might result in continually increasing gift size as givers seek to make sure that the gift is large enough.
Given the above, it is worth asking whether gifts are the most efficient way to make this signal or whether there is a way for all parties to agree to restrain the costs that they will incur. On the first point, the evidence of continued gift giving would suggest that the givers consider this an efficient way for them to signal. However, this is an indicator of private efficiency and it may not be the socially optimal method.
On the second point of restraint, one possibility could be along the lines of Robert Frank’s suggestion of progressive consumption taxation. If the government taxed consumption at a progressively higher rate, there would be less incentive to engage in competitive conspicuous consumption or gift giving. However, we then end up back where we started. As Kirchner asked, if we put this money into the hands of government result in the purchase of goods with an even lower value to the recipients? Personally, I would rather trust my loved ones.