Giving benefits and inefficiencies

“We make a living by what we get. We make a life by what we give.” — Winston S. Churchill.

THIS past Christmas season, people were very eager to go back to normal by reviving practices that were suspended during the 2020-2021 pandemic seasons. Celebrations and gatherings were back in vogue, and these were of course accompanied by the frenzy of gift giving.

Giving gifts manifest a human need to express affection. And what better time to give gifts to delight those we care for than with Christmas presents. Of course, there is the religious context of imitating the three wise men for honoring the child Jesus. There is the Santa Claus effect on children which adults rekindle for their kids. For business, it is a time for promotion and advertising and for many people a time to show appreciation to others who have helped make the past year a good one.

But there is also the “selfish” reason for giving. Put simply, it makes us feel good. It releases several happy neurochemicals that provide that “warm glow” feeling. It reduces blood pressure and decreases stress levels.

Economists for a long time have focused on the multiplier effect of increased consumption through gift buying. The macro economy benefits as enterprise are built and jobs are created through the many businesses and industries spurred by the Christmas frenzy. As consumption is part of the gross domestic product growth equation, it is encouraged.

In the past decade, however, some economists have pursued a contrarian thought, arguing about the deadweight loss of Christmas gift-giving. Joel Waldfogel gained notoriety for this thesis, and even followed it up in a book Scroogenomics.

Waldfogel said: “An important feature of gift giving is that consumption choices are made by someone other than the final consumer. Gifts may be mismatched with the recipient’s preference. It is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash. In short, gift-giving is a potential source of deadweight loss.”

In his research, Waldfogel found that of the $65 billion spent in the winter holiday of 2009, about 20% was wasted in the sense that the gifts were worth that much less to the recipient than they cost. If you’ve ever been presented with a shirt you would never wear in public, or food you don’t really like, this is exactly Waldfogel’s point.

In its Christmas 2022 issue, The Economist highlighted Waldfogel and the inefficiencies of Christmas. It added another inefficiency source for retailers, the fact that it comes but once a year. Because of preparation and staffing for peak demand, there is a lot of unused capacity at quieter times of the year. This is a by-product of seasonality.

This may be nitpicking economic analysis, but they’re worth some attention if indeed the inefficiencies may be addressed. Find ways to be a better giver by looking for optimal gifts. For example, is it alright to simply give cash? Unfortunately, cash is appropriate for some relationships but highly inappropriate for others. I can give P1,000 to my nephew and he’ll be excited, but should I give a P1,000 cash gift to a colleague or to a boss?

George Lowenstein and Cass Sunstein provide some behavioral economic perspectives: “Gifts also serve as investments in relationships.” In giving gift cards, no destruction of wealth may have occurred, but very little investment has likewise occurred, either. Even when people don’t like the gifts, people will notice the effort and money that went into the purchase.

“In fact, destroying value in an exchange of overpriced gifts can increase the likelihood that the relationship will endure.” Gifts send messages, although it admittedly may not be easy to interpret the message.

In life, there are a lot of unintended consequences, as in gift giving. There may be deadweight costs lying around, built around the phenomenon of asymmetric information. What we know about the next person may not be congruent with what he feels about himself. But appreciating the human psychology in the exchange makes the costs worth its while.

Let the economists pursue their analysis, and hopefully we too try to reduce inefficiencies. But the deadweight costs, in my opinion, are well worth the relationships built, and the “warm glow” that imbibes the giver. So, keep on giving. As Churchill said, giving is the essence of what makes life.

(The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.)

Benel Dela Paz Lagua was previously EVP and chief development officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs.