Legal Commentary

Gift-Giving and Government Planning

By Ilya Somin

In a well-known 1993 article and a recent book, economist Joel Waldfogel argues that holiday gift-giving is inefficient. Very often, givers don?t fully understand the recipients? wants and end up purchasing things that the recipients value at less than their cost. Waldfogel estimates that some 10 to 33% of the value of gifts is ?wasted? in this way. Even gift certificates (which allow recipients to use the money to purchase any goods available at the store in question) are, on average, worth only about 70 to 86 percent of their face value to the recipient.

Unlike Waldfogel, I am not convinced that this proves that gift-giving is inefficient or irrational. True, the recipient would be materially better off if the giver would simply send him a check for $50 instead spending the same amount of money on a gift. However, buying a gift instead of sending money serves a signalling function: it shows that you care enough about the person to spend time and effort figuring out what they might like. And if you succeed in buying them something they really want, it shows that you understand them relatively well. Thus, the recipient might ultimately be happier to receive a gift that is ?only? 90% as valuable to him as its market price than to receive 100% of the gift?s price in cash. Similarly, if you get a gift that you value far less than its price, that?s a sign that the giver either doesn?t understand your preferences very well, or didn?t make the effort to try to figure them out. Both scenarios give you some useful information about your friends and relatives that you wouldn?t get from a check. In sum, gift-giving may often be better than giving money because givers use it to send social signals, and recipients use it to judge how well the givers understand them. As in Waldfogel?s previous book arguing that markets give too few choices, he underestimates the utility of market transactions.

That said, Waldfogel?s research does show that we often do a poor job of figuring out the true desires of our friends and relatives ? the people we know best. As Virginia Postrel points out, this result strengthens the Hayekian case against government planning:

The problem of buying good presents for other people, even people you supposedly know well, illustrates that old familiar Hayekian concept, the knowledge problem. If you can?t even give your loved ones the right presents, how likely is it that a central authority could make the right decisions for everyone?

Just another example of why Hayek is still relevant decades after he wrote his most important work.

Full post as published by The Volokh Conspiracy on December 05, 2009 (boomark / email).