Yuletide Economics Page

 

In October 2009 Princeton University Press releases my new book, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Please visit Princeton’s page for a book description and video interview.  This page describes how I got into this work.

 

For the most part I work on serious mainstream academic issues (such as the functioning of differentiated product markets, intellectual property piracy, the effects of information on markets, and various aspects of litigation). 

 

But in 1993, after my first few holiday seasons at the receiving end of uninformed good intentions, I published a little paper in the American Economic Review called “The Deadweight Loss of Christmas.”  The point was simple: elementary microeconomics teaches that consumers are better than others at eking the most satisfaction out of their shopping dollars.  If this is true, then the sweaters, fruitcakes, and cribbage boards we receive as gifts should produce less satisfaction than cash gifts of equal size, putting aside sentimental value.  I confirmed this theoretical prediction with a modest bit of empiricism, a couple of surveys of Yale undergraduates.  The result: holiday gift giving destroys about a sixth of the value of gifts, in today’s dollars perhaps $10 billion annually.

 

Consumer sovereignty, the idea that the consumer is best situated to make his or her own consumption choices, is one of the foundations of many economists’ disdain for government.  So if you dislike government because of its damaging effects on allocative efficiency, consistency requires you to have reservations about Santa Claus as well.

 

Access to the paper through JSTOR.

 

The paper attracted some popular interest, including these highpoints:

        NYT article, Dec. 1993

        CBS This Morning Appearance, Dec. 1993.

 

 

Not content to leave well enough alone, I followed up the original paper with another paper in Economic Inquiry, based on a far larger sample of students at multiple schools.  With the larger sample, I could compare recipient satisfaction per dollar spent across givers of different races, religions and ethnicities.  The paper also rationalized non-cash gift giving with a quantifiable cash-giving stigma.

Abstract: Each year individuals in the United States transfer between $50 and $72 billion in resources in the form of noncash holiday gifts, despite the fact that holiday gift recipients apparently value their noncash gifts at about 10% less than the prices paid by the givers. We document that cash giving is more likely from givers who tend to give unwanted gifts, indicating that givers are concerned with the utility of their recipients. The rarity of cash gifts can be rationalized by a stigma of cash giving that we are able to parameterize and estimate using a simple structural model.

 

 

In 2005 I published yet another Christmas paper, “Does Consumer Irrationality Trump Consumer Sovereignty?” in the Review of Economics and Statistics.  This paper compared the satisfaction that people got, per dollar spent, from gifts in contrast with their own purchases.  The answer: people get about 18 percent more satisfaction, per dollar spent, on things they buy for themselves than on things they receive as gifts.  In the face of mounting evidence from behavioral researchers on shortcomings in decision making, this result provides justifies a sphere of deference to consumer sovereignty and, along the way, confirms a substantial deadweight loss of Christmas.

 

Abstract: Scholars working on the border of economics and psychology have documented many contexts in which individual decision-making is unreliable and might be improved by paternalistic interventions. Against this mounting body of negative evidence, economists’ default belief in consumer sovereignty has been motivated primarily by theory rather than evidence. The goal of the present study is to see whether there is direct evidence supporting economists’ faith in consumer sovereignty in a simple context. We address this question by presenting direct evidence that consumers’ own purchases generate between 10% and 18% more value, per dollar spent, than items received as gifts.

 

 

The deadweight loss of Christmas has, pardon the pun, a certain evergreen quality.   I field a few reporters’ calls each year.  The Economist published a nice description of the research in 2001. The FT published pieces in 2004 and 2005. For some reason 2006 was a big year.  The deadweight loss of Christmas got written up in a front-page Wall Street Journal article (albeit in a slow news week), as well as a New York Times article.  The work got one of its best treatments ever in a New Yorker piece.  I took my own liberties in a Slate article.

 

 


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