Last year, Americans spent a record breaking 929.5 billion dollars on holiday retail shopping. According to the National Retail Federation, this number is only expected to rise: 2023’s holiday total is estimated to be 966.6 billion dollars. 

Commonly, this type of consumer spending is well-received; it spurs economic growth and is a key indicator of our economy’s health. But when this money is spent on gifts, the economics play out a littledifferently. 

In 2001, economist Joel Waldfogel, published a paper titled “The Deadweight Loss of Christmas.” In this paper, Mr. Waldfogel examines the results of a March 1993 survey he administered to undergraduate Yale students regarding the gifts they received over the holidays the previous year. The survey asked the students to think about the gifts they received, estimate how much was spent on the gift, and specify the minimum amount of cash they would exchange the gift for. Mr. Waldfogel also asked the students to specify the relationship they had with each gift-giver and to exactly describe the gift in order to be later divided into one of three categories: cash, gift certificates, and actual gifts. 

Mr. Waldfogel then compared the monetary value the students placed on the gifts with the actual amount of money that was spent on buying them. On average, he found the ratio of the receiver’s value to the giver’s expenditure to be 83.9% –thus arguing that gifting created a deadweight loss. In economics, a deadweight loss is defined as the cost to society that arises from market inefficiency, which appears when supply and demand are unbalanced. During gifting, the supply curve indicates the price that an item’s sellers are willing and able to provide. However, the demand curve does not indicate the price that the item’s buyers value it at – rather it indicates the price that the item’s consumers (the gift receivers) value it at. But since the gift’s consumer never sees the price of the gift, they never know whether or not they value it that much, thus creating market inefficiency and subsequent deadweight loss. 

Although this may suggest that, from an economist’s perspective, gift giving should be avoided, Mr. Waldfogel found that the results varied considerably depending on who was doing the gift-giving. Friends, for example, had an average ratio of 98.8% while grandparents had an average ratio of 62.9%. However, those on the lower end of the spectrum were also more likely to give cash, which created no market inefficiency. 

This was, in the end, what Mr. Waldfogel endorsed. The savior to our Christmas-time market inefficiency is the increased popularity of gift cards. Although to some, they may suggest a certain amount of detachment, the gift givers ability to choose which specific store the gift card is for allows them to be more personal than just giving out cash. 

But don’t worry if gift cards aren’t your forte. In a Chicago Booth survey of many economist’s feelings  about Mr. Waldfogel’s paper, most respondents disagreed. “Cash is more efficient in a narrow sense,” said Joseph Altonji, a professor from Yale who participated in the survey, “but holiday gift exchanges are about interpersonal relationships.”