Bailout

Giving cash or gift cards

By Felix Salmon

Go read Barry Ritholtz’s attack on gift cards, and then read Andrew Leonard’s response. Actually, don’t do either: you should instead take advantage of the fact that absolutely nothing seems to be going on today to go out and buy a proper present or two instead.

At heart, the debate over gift cards isn’t really about gift cards at all: it’s about individual attitudes towards the fungibility of money. Barry’s a great believer in giving cash, or, failing that, giving something which is “practically cash”, like a prepaid credit card. Andrew, by contrast, fears that giving cash is a waste:

Cash, like it or not, carries with it some assumption of responsibility. You don’t want to waste your cash frivolously, or you might feel compelled to save it for some greater goal…

If you gave me cash for Christmas, I’d probably save it to pay for groceries. But if you gave me a gift card redeemable at my local bike shop — I’d be utterly delighted to splurge on new gloves.

I’m surprised that Barry Ritholtz, hard-charging econowonk and hedge-fund manager, seems to believe that money stops being fungible when it’s gifted, while Andrew Leonard, bearded west-coast pinko, is the kind of person who deposits gifted cash into a bank account, where it dissolves into the pool of money needed to buy toilet paper and pay the rent.

I’m more like Andrew than Barry: if you tuck a check into my birthday card I’ll be very grateful, but I won’t mentally ring-fence that money and feel permissioned to splurge it. But I’m also very close to people on Barry’s side of the debate, who feel morally compelled to buy something they don’t really need if they get cash as a present.

So I’ll come down in the middle on this one: cash generally becomes more of a present the more likely the recipient is to treat it like a present. Gift cards, by contrast, might be a better bet for someone like me. Yes, there’s a deadweight loss to them — but as Joel Waldfogel demonstrates, there’s a deadweight loss to nearly all gifts. In a way, it’s the deadweight loss which makes them gifts.

One thing I’m unclear about, though: do gift cards generally cost more or less than the present which would otherwise have been bought? Do people have a mental budget for gifts, which they can easily spend in full on a gift card? That would imply that gift cards cost more than presents. Or do people mentally take account of the increased utility and cash-like characteristics of gift cards and scale back their spending accordingly? Has anybody done any studies on this?

Full post as published by Macroprudential on December 23, 2009 (boomark / email).