Can doing good be bad?
- At food banks, the holiday season brings an avalanche of food from donors when the charity could purchase the food more cheaply and use volunteer time more wisely. As a result, charitable food donations misallocate resources.
- According to research from economist Joel Waldfogel, we tend to undervalue the price of a gift we dislike while giving much greater value to what we buy for ourselves. As a result, gift giving destroys value.
However, this Economist article suggests remembering that 1) a gift we dislike may be good for us, 2) a gift can be an extravagance we otherwise would not purchase, and, perhaps most importantly, 3) the process of giving adds intangible value to the gift.
The Economic Lesson
Wasted giving could be called “deadweight loss.” Described by Freakonomics, it represents the difference between the cost of an item and how much the recipient values it. So, if you are a Yankee fan and someone gives you a Boston Red Sox hat, the deadweight loss would be 100% of the price. The amount by which pleasure falls is the deadweight loss.
But, is the deadweight loss of gift giving to friends and charities offset by its intangible benefits?
An Economic Question: How might you estimate the deadweight loss of gifts you have received?
With the holiday season beginning, we should consider the economics of gift giving. Let’s start with University of Pennsylvania Professor Joel Waldfogel who focused on receiving gifts. Then, through Duke’s Dan Ariely, we can look at how to give the best gifts.
Dr. Waldfogel’s research could make us decide not to buy any gifts. His basic conclusion was that when people express a value for a gift, the amount is usually less than the actual cost. By contrast, when they buy something for themselves the value soars. Empirically, he says that our own purchases generate on average 18% more value than purchases from others. You might enjoy looking at the survey (p. 17 of his paper) that he gave to 202 students.
Dan Ariely solves the dilemma by suggesting that we give gifts that people would feel guilty buying for themselves. As economists doing cost benefit analysis, we would say that guilt increases the cost side. By contrast, when the same item comes from someone else, because the recipient’s guilt disappears, cost diminishes. The result? Benefit exceeds cost.
The Economic Lesson
The loss in value to the gift giver and getter is called deadweight loss. Economists can draw deadweight loss on a demand and supply graph. For us now, though, just think of a loss in value as a cost.
Because value decreases for a gift, cost rises and everyone’s “pleasure” diminishes. The amount by which “pleasure” falls is the deadweight loss.
According to Wharton School economist Joel Waldfogel, we might be better off if we stop gift giving. Dr. Waldfogel says that all too often, the value of the gift to the recipient is less than the price the giver paid. The resulting “deadweight loss” makes him conclude that holiday gift giving is not as beneficial as many assume.
Perhaps this is an ideal example of economists knowing the price of everything but not the value or (opportunity) cost.
Waldfogel discusses his research in a recent Slate article and today’s “Note”, a youtube interview:
Deadweight Loss: Value that “disappears” because a price does not reflect a cost/benefit match. If you are willing to pay $30 for a t-shirt which cost a gift giver $50, then the deadweight loss is $20. If the giver got $10 of pleasure, still the deadweight loss in $10.00. More typically, deadweight loss refers to taxes and monopoly pricing.