[THE VIEW]The Economics of Christmas Gifts

From Deadweight Loss to Social Coordination
Rethinking "Efficiency and Welfare" During the Christmas Season

Christmas, the biggest holiday in the United States, is just around the corner. Just as gifts are exchanged in Korea during Christmas, Americans also give and receive presents, but the scale of this market is enormous. According to one survey, last year American consumers spent an average of about 1 million won on Christmas gifts.

In some cases, the recipient is delighted and uses the gift for a long time, but in other cases, the gift becomes useless and is thrown away like trash. Consumer surveys show that about 61% of Americans have received gifts they did not want. Given the total population, this means tens of millions of people receive useless presents. In this way, exchanging gifts can be seen as a waste of resources. An extreme example is the "exchange of useless gifts" trend popular in Korea. The word "useless" in the name already shows that the utility of the item is far lower than its price.

A book that points out this economic waste of resources is Joel Waldfogel's "Scroogenomics." According to this book, the culture of gift-giving, including Christmas presents, reduces the overall welfare of society. Because people cannot accurately predict others' preferences, the utility felt by the recipient is inevitably lower than the price of the gift. For example, if I give someone a gift worth 10,000 won, the recipient will feel utility worth less than 10,000 won. This difference creates what economists call "deadweight loss," and ultimately, gifts are concluded to be inefficient consumption.

So, is there no solution at all? Waldfogel offers a practical alternative. If it is difficult to know exactly what the recipient likes, he suggests giving something that most people enjoy. The most representative examples are cash or gift cards. Since cash can be freely used by the recipient, there is almost no loss in value. Gift cards, although limited in where they can be used, can provide much higher utility than an item randomly chosen by the giver. In fact, surveys in Korea show that the number one gift people want to receive during holidays is cash or gift cards. Similarly, in American surveys, 50-60% of respondents said they would prefer to receive cash or gift cards as year-end gifts.

The exterior and surroundings of the Lotte Department Store Main Branch in Jung-gu, Seoul, are decorated with Christmas ornaments. As December, the biggest sales season in the distribution industry, approaches, major retailers are intensifying their Christmas marketing efforts.

However, even though gift cards are theoretically efficient, they are not a perfect solution in reality. Studies show that about 20-30% of gift cards issued in the United States are never used before they expire. Consumers may forget about their gift cards or find them useless because the places where they can be used are too limited. In addition, if the gift card amount is awkward, recipients may have to spend extra money of their own, which can lead them to not use the card at all. In such cases, gift cards are hardly better than cash and create another inefficiency in the form of unused balances.

Cash is not always the best option either. Although traditional economics views gifts as a kind of market transaction, in reality, gifts also carry social meaning. Recently, experimental economists have focused on the non-monetary value of relationships between people, such as bonds and affection. While cash is certainly convenient, it can also create the impression that "you and I are in a cold, transactional relationship."

In this case, even if cash is more efficient, the social value created by gift-giving may actually be lower. In fact, experimental results show that small gifts can foster more friendly relationships and promote cooperation compared to giving cash.

From a macro perspective, the culture of exchanging gifts can be more efficient than expected. Concentrated consumption during the Christmas season leads to positive effects such as job creation and inventory clearance. There is also institutional significance. By exchanging gifts, everyone naturally gets in touch at the same time, which reduces the cost of maintaining relationships. Therefore, gift exchange is sometimes called a social coordination mechanism.

Thus, the economic meaning of Christmas gifts is complex. If we only consider traditional utility, the most efficient gift would be one that maximizes the recipient's choice rather than the giver's effort. However, when we also consider the social value of non-monetary gifts and their macroeconomic effects, gifts are not necessarily inefficient. Gifts are both an economic transaction and a kind of social mechanism that connects people.

Seo Boyoung, Professor at Indiana State University