American Economic Association

The Deadweight Loss of Christmas: Reply

Author(s): Joel Waldfogel
Source: The American Economic Review, Vol. 88, No. 5 (Dec., 1998), pp. 1358-1360
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/116878
Accessed: 27-01-2016 15:33 UTC

REFERENCES
Linked references are available on JSTOR for this article:
http://www.jstor.org/stable/116878?seq=1&cid=pdf-reference#references_tab_contents

You may need to log in to JSTOR to access the linked references.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/
info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content
in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship.
For more information about JSTOR, please contact support@jstor.org.

American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic
Review.

http://www.jstor.org

This content downloaded from 193.198.213.36 on Wed, 27 Jan 2016 15:33:06 UTC
All use subject to JSTOR Terms and Conditions
 The Deadweight Loss of Christmas:Reply
By JOEL WALDFOGEL *
John A. List and Jason F. Shogren (1998)
take a novel approachto measuring the dead-
weight loss of Christmas. They make use of
an auction, avoiding problems associated with
recipients' assignment of hypothetical value to
gifts. Whereas I find statistically significant
deadweight losses associated with Christmas
gift-giving (Waldfogel, 1993, 1996), they find
that Christmasgift-giving generates a welfare
gain of 21 to 35 percent. I offer only a few
comments, which apply not only to their study
but which may help advance the study of the
deadweight loss of Christmas. I make three
points, one theoretical and two related to
measurement.
First, it is difficult to reconcile value crea-
tion through gift-giving with conventional
economic theory. Psychologists have syste-
matically documented a stigma associated
with cash-giving (Paul Webley et al., 1983;
Carole B. Burgoyne and David A. Routh,
1991). Viewed from the standpoint of con-
sumer theory, this stigma functions as a tax, or
as a distortionon choice. Facing such a "tax,"9
a giver would preferto give a value-destroying
noncash gift ratherthan cash. To be concrete,
if the stigma of giving cash "costs" the giver
$10, the giver would rather spend $100 on a
sweater worth only $91 to the recipient than
give $100 in cash. Givers expecting their gifts
costing $100 to be valued over $90 will choose
to give noncash gifts. In order for gift-giving
to create value, on average, gifts expected to
be valued above their cost must outweigh the
gifts expected to destroy value but given to
avoid stigma. Value creation therefore faces
an uphill struggle.
Suppose there is variation across givers in
their gifts' expected yields. Some givers ex-
* Public Policy and ManagementDepartment,Wharton
School, University of Pennsylvania, Philadelphia, PA
19104 (email: waldfogj@wharton.upenn.edu). I thank
Mary Benner, Pete Klenow, Jeff Milyo, and Scott Smart
for comments.
1358
This content downloaded from 193.198.213.36 on Wed, 27 Jan 2016 15:33:06 UTC
All use subject to JSTOR Terms and Conditions
pect recipients to value their gifts above their
costs; other givers expect recipients to value
their gifts below cost. Cash-giving is the
"safety valve" that prevents especially inept
givers from destroying value. The stigma of
cash-giving inhibits operation of the safety
valve by inducing inept givers to nevertheless
give noncash gifts.
It is a deeply held-albeit generally un-
tested-tenet of economic theory that con-
sumers' own choices maximize utility. If
givers, through their choice of gifts, can
achieve higher recipient utility than can the re-
cipients themselves, then a fundamental eco-
nomic assumption is called into question. I
point this out not to dismiss List and Shogren's
careful study but ratherto suggest that the im-
plications of the debate extend beyond Yule-
tide economics. It is importantto bear in mind,
however, that the inefficiency concerns the ob-
jects chosen and not the act of giving. Recip-
ients may well value gift receipt. Studies of
recipient valuation of gifts must be very care-
ful to distinguish recipient valuation of gift ob-
jects from recipient valuation of gift receipt.
Second, as List and Shogren admit (see their
footnote 1), they adopt a conservative mea-
surement approach which produces lower-
bound estimates of deadweight loss. There are
two basic ways to measurerecipient valuations
of their gifts. One can elicit their willingness
to pay ("buying price") or one can elicit what
recipients value in exchange for gifts ( "selling
price"). It is well known (see, for example,
Jack L. Knetsch and J. A. Sinden, 1984) that
selling prices exceed buying prices. Hence,
deadweight loss estimates based on selling
prices are much smaller than deadweight loss
estimates based on buying prices. List and
Shogren use a selling-price approach. In my
own first surveys on the deadweight loss of
Christmas, I found large differences between
deadweight losses based on buying- and
selling-price approaches (Waldfogel, 1993).
Recipients in my surveys were willing to pay
only two-thirds of the gifts' estimated pnrces,
VOL. 88 NO. 5 WALDFOGEL:DEADWEIGHTLOSS, REPLY
while they required compensation of roughly
90 percent. Thus the buying-price deadweight
loss is two to three times larger than the
selling-price deadweight loss. Efforts to shrink
the deadweight loss of Christmas would ben-
efit from evidence that the amount recipients
are willing to pay for their gifts, not simply
what they require in return,is larger.
Third, List and Shogren's study (and all
others, including my own) suffer from a po-
tentially inappropriate benchmark. The lit-
erature has compared the yield on Christmas
gifts (the ratio of estimated value to price
paid) to a benchmark yield of one on cash.
However, recipients use the cash to purchase
objects. Consumer theory teaches that mar-
ginal objects purchased have valuation equal
to their cost, appropriately weighted by the
marginal utility of income. However, objects
that recipients purchase may be valued
above prices paid. To the extent that recipi-
ents would have made inframarginal pur-
chases with cash, the appropriatebenchmark
exceeds one, and the true deadweight loss of
Christmas exceeds existing estimates. It
would be interesting to see a study such as
List and Shogren's performed on recipients'
nongift possessions.
List and Shogren have done an interesting,
careful, and thought-provoking study. There
are reasons to doubt that the gift-giving is an
efficient means of resources allocation. At the
This content downloaded from 193.198.213.36 on Wed, 27 Jan 2016 15:33:06 UTC
All use subject to JSTOR Terms and Conditions
1359
same time, their study raises questions-per-
haps also relevant to the other 11 months of
the year-that only additional research will
answer.
REFERENCES
Burgoyne,CaroleB. and Routh,DavidA. "Con-
straints on the Use of Money as a Gift at
Christmas: The Role of Status and Inti-
macy." Journal of Economic Psychology,
March 1991, 12 (1), pp. 47-69.
Knetsch,JackL. and Sinden,J. A. "Willingness
to Pay and Compensation Demanded: Ex-
perimentalEvidence of an Unexpected Dis-
parity in Measures of Value." Quarterly
Journal of Economics, August 1984,
99(3), pp. 507-21.
List, JohnA. and Shogren,JasonF. "The Dead-
weight Loss of Christmas: Comment."
American Economic Review, December
1998, 88(5), pp. 1350-55.
Waldfogel, Joel. "The Deadweight Loss of
Christmas." American Economic Review,
December 1993, 83(5), pp. 1328-36.
__. "The Deadweight Loss of Christmas:
Reply." American Economic Review, De-
cember 1996, 86(5), pp. 1306-08.
Webley, Paul; Lea, Stephen E. G. and Portalska,
R. "The Unacceptability of Money as a
Gift." Journal of Economic Psychology,
1983, 4(3), pp. 223-38.
1360 THE AMERICANECONOMICREVIEW DECEMBER 1998

This content downloaded from 193.198.213.36 on Wed, 27 Jan 2016 15:33:06 UTC
All use subject to JSTOR Terms and Conditions