"According to the survey, an average Ukrainian will spend about Hr 1, 200 to buy gifts, about Hr 850 on food, and Hr 450 on entertainment."
In these crisis times, the deadweight loss of Christmas presents becomes even more important to avoid:
Imagine the following: some days before Christmas, you go shopping to buy some Christmas gifts for your family. In one of the shops, you notice an interesting book. You browse through the book, find it interesting and consider buying the book – you decide that you will buy it if it costs not more than 50 UAH. You ask the shop lady for the price and she tells you the book costs 100 UAH. Given that the cost of the book (100 UAH) is higher than your valuation of the book (50 UAH) you decide not to buy the book.
On Christmas Eve, your family gathers under the Christmas tree to exchange gifts. You open the gift presented to you by your uncle and to your surprise, you see the book you noticed in the shop some days before. You’re excited – you get a book that you valued 50 UAH, for free. Your uncle is happy that you like his gift.
The above scenario is a typical Christmas scenario and most people wouldn’t see anything wrong with it. Economists however would immediately indicate that despite the fact that everybody is happy, value was destroyed. Indeed, your uncle paid 100 UAH for something that you value just at 50 UAH.
Imagine now that your uncle had bought you another book that costs 50 UAH and that you also value at 50 UAH. If he had given this book to you on Christmas Eve, you would have been excited since you would have gotten a book that you valued at 50 UAH, for free. And your uncle would also have been happy seeing that you liked the gift. The only difference with the first scenario is that in the current scenario your uncle still has 50 UAH left which he can either save or use to buy a gift for your aunt (or an additional gift for you!). In that way, more people would have been happy (or you would have been happier receiving two gifts rather than one). Hence, by giving you a present that costs more than you value it, your uncle clearly did not make the best choice.
For many people the above story should be familiar. Most of us indeed have received gifts that they don’t like which is just an extreme case of the above example – you value at zero something that somebody else has paid for. A recent survey by Ebay found that 80% of people already did at least once receive a gift they didn’t like. Moreover, 60% of people expected to receive a gift they wouldn’t like this year.
Given this, it should not be surprising that the amount of value destroyed by Christmas gifts is substantial. The American economist, Joel Waldfogel, who first studied this issue, found that the receiver of a gift on average values the gift 10% less than what the giver has paid for it and computed that, given the amount of money that is spent on Christmas gifts, several billions of dollars in value are destroyed each year at Christmas.
Of course, one should not interpret the above as a reason to stop giving Christmas gifts. Indeed, the gift industry makes a big part of its turnover during the Christmas period and the sales of gifts creates value. Instead one should try to minimize the lost value caused by unwanted Christmas gifts. There are several ways this can be done.
First, receivers of unwanted gifts can reduce the loss of value – the typical solution so far consisted of passing the gift to someone else. The technological evolution has provided another solution – EBAY now organizes in some countries special Christmas actions stimulating people to auction off their unwanted gifts.
Second, the givers can spend extra effort to buy the right gifts – that is to find gifts with a price that matches the valuation of the receiver. Givers should try to get information about the preferences of the receivers. This is what people typically do – they go from shop to shop to check out what is available on the market and could fit a friend or family member’s preference. My own experience tells me this whole process is rather stressful and many friends have confirmed this, which makes one wonder whether this process doesn’t destroy even more value than just giving unwanted presents. An easier alternative to optimize gift giving is simply asking people what they would like to receive – though many people are reluctant to reveal their preferences. A simpler way out is to give gift certificates - these typically limit only where one can buy but not what one can buy. Obviously, to completely avoid the value loss of Christmas presents, one can always just give money. If you rap it nicely, I am sure the receiver will be happy.
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