When Giving a Gift Comes With a Cost

Credit: Charles Thompson | Stock Xchng (Image credit: Charles Thompson | Stock Xchng)

A familiar post-holiday ritual sees people head once more for the stores to return unwanted gifts or spend their gift cards. But gift-givers might save a lot grief by simply asking what the recipient wants in the first place, if not just handing over a wad of cash.

Such tactics avoid what economists call the "deadweight loss" of gift-giving. That translates into the unloved sweaters, gaudy trinkets and bizarre gadgets that are accepted with a forced smile, and it's the difference between what the giver paid and how much the recipient actually values the gift.

Nobody knows just how much deadweight loss factors into the gift-giving that takes place during the Christmas season. But studies have suggested that many people know less about giving gifts than they ought to, despite having past experience.

"I don't think it surprises many people when you look at the return lines on the day after Christmas," said Kristine Principe, an economist at Niagara University in New York.

Those big spenders may delude themselves into thinking that a more generous gift will pay off with even greater appreciation from gift recipients. Yet a 2009 study in the Journal of Experimental Social Psychology found no connection between a gift's price tag and the actual levels of appreciation among gift recipients.

Similarly, Principe co-authored a 2009 study in the Journal of Socio-Economics that found the more generous gifts did just as badly or worse in terms of deadweight loss. [7 Holiday Marketing Tricks]

Weighing the damage

In that 2009 study, Principe and Joseph Eisenhauer, an economist at Wright State University in Dayton, Ohio, looked at the gifts received by 105 respondents who were mostly college students split about equally among males and females.

But unlike past studies that simply asked recipients to estimate what the giver had paid for their gifts, the researchers got the actual receipts or asked recipients to check catalogs and stores for the prices. The estimates turned out on-target for most gifts, anyway.

The difference between what the recipient would've paid for a gift and its actual price was the deadweight loss, which turned out to be an average of more than 7 percent of market value among all the gifts. Gift cards had an even worse deadweight loss of 14 percent — perhaps the result of being locked into a purchase from a certain store, not to mention the expiration dates on many gift cards.

Many people may turn to gift cards as a compromise between not knowing what the recipient wants and  being too shy to hand over cash. That choice may turn out to be one of the worst in terms of gift value, according to this study.

The gifts with the largest deadweight losses of about 25 percent included accessories, such as wallets and belts, books, kitchen gadgets, musical instruments and vehicles.

Who gets it

Large deadweight losses by gift-givers, ranging from 12 to 24 percent of cost, occurred with gifts from girlfriends, spouses, grandparents and in-laws. By contrast, gifts from parents show smaller losses of 6 to 10 percent of cost.

But some of the blame for the losses may fall upon the recipients, rather than the givers. Deadweight losses were large on gifts to males and younger recipients, but not on gifts to females and older recipients.

"Our evidence suggests that females tend to be better signalers of what they want to receive, which is maybe not surprising," Principe told LiveScience.

What to do

Still, givers of gifts who don't have vocal female recipients aren't entirely out of luck. There are several ways to cut the deadweight loss out of the Christmas season, with cash still representing the most surefire route.

People who consider giving a fistful of dollars too impersonal might ask the recipient to create a wish list — something that many online stores already offer — if they don't want to ask about their preferred gift outright.

In the end, avoiding the gift card compromise and taking the time to learn a bit about the recipient may be best for those who want to maintain a personal touch.

"We have a strong cultural tradition of gift-giving," Principe said. "The way to avoid deadweight loss is to know your recipient's preferences."

Jeremy Hsu
Jeremy has written for publications such as Popular Science, Scientific American Mind and Reader's Digest Asia. He obtained his masters degree in science journalism from New York University, and completed his undergraduate education in the history and sociology of science at the University of Pennsylvania.