The Economics of Gift Giving

Whether gifts destroy value, as one famous economics paper argued, or create value through relationships and signalling.

Every year, people spend large sums on gifts for birthdays, weddings, festivals and holidays. Economists have asked a provocative question: are gifts economically efficient?

The deadweight loss of Christmas

In 1993, economist Joel Waldfogel published a paper titled “The Deadweight Loss of Christmas”. He surveyed students about the gifts they received and how much they valued them compared with what the gifts cost. He found that recipients, on average, valued gifts at less than their purchase price, often estimated at 10 to 33 percent less. Because the giver spent more than the recipient valued the gift, some value was lost, a deadweight loss.

Why cash seems better

In standard economics, cash is the most efficient gift: recipients can buy exactly what they want. A gift chosen by someone else may not match the recipient’s preferences.

Why people still give gifts

Economists and other researchers offer reasons gifts may create value beyond their market price:

Signalling: a thoughtful gift shows care, effort and knowledge of the recipient, which cash cannot.
Relationships: gifts strengthen social ties and reciprocity.
Discovery: a gift may introduce the recipient to something they would never have bought but end up enjoying.
Social norms: in many cultures, cash gifts are considered impersonal in some contexts, though in others, such as Indian weddings, cash gifts in envelopes, called shagun, are traditional and welcomed.

Gift cards

Gift cards try to combine choice with a personal touch. But a large share of gift card value in some countries is never used, a benefit to retailers rather than recipients.

Charitable gifts

Some people give donations to charity on others’ behalf, combining a gift with social value.

The unwanted sweater

A relative spends 2,000 rupees on a sweater for a nephew, who would never have bought it and values it at only 800 rupees. By Waldfogel's logic, 1,200 rupees of value was lost. But if the nephew treasures the thought behind it, or wears it and grows to like it, the gift's true value may be higher than it first appears.

Thinking cash is always the best gift

Cash maximises choice, but gifts also communicate care and strengthen relationships. Whether a gift destroys or creates value depends on more than its price.

Key takeaways

Waldfogel's 1993 paper argued gifts create a deadweight loss because recipients value them below cost.
Cash is efficient in standard economics because it allows free choice.
Gifts create value through signalling care, strengthening relationships and discovery.
Cultural norms, like cash gifts at Indian weddings, shape what gifts are appropriate.