The Economics of Gift-Giving | EJ Gift Cards

Our Goals Compared to their Outcomes

Economists have a bad rap. Heck, the entire economic discipline has developed a bit of a poor brand for a few centuries. Victorian historian Thomas Carlyle coined it the “dismal science” in the 19th century, and not much within the subject has changed since then to alter that perception. So when an economist came out in 2013 to bemoan the tradition of gift-giving surrounding holidays, readers bemoaned one more attempt by a stodgy academic to destroy a cherished more of our childhoods.

Joel Waldfogel didn’t want to play this boogeyman role. As an economist, he was hardwired to seek out inefficiencies wherever they lie. When he started examining the valuation underlying gift-giving practices, he decided this was a good a place as any to dig in. His seminal paper on the topic, “The Deadweight Loss of Christmas,” really didn’t hold back on his feelings. In the executive summary, Professor Waldfogel states:

“Between a tenth and a third of the value of holiday gifts is destroyed by gift-giving. Deadweight losses of in-kind government transfers are thus no larger, and in many cases smaller, than the deadweight losses of holiday gift-giving.”

That’s a lot of economist-speak, so before we dive into the underpinnings of the statement, let’s explain the basic premise here. Deadweight loss is an academic term for the loss of economic efficiency. It can occur in numerous ways, but the end result is always the same: destruction of value because of mismatches.

Maybe this is ringing a bell from that Econ 101 class you slept through in undergrad. Maybe you’re reading this like it’s a piece of arcane Latin. Regardless of your feelings about Scrooge economics, let’s dive into what Professor Waldfogel was trying to get at here.

The Mismatch in Value Perception

Professor Waldfogel had done this dance for years. The holidays roll around, pressure builds to give that perfect gift, and the anguish of January credit card bills follows shortly thereafter. Our gift-giving traditions run deep, and his motivation wasn’t to end those to save a bit of cash. It was to ask a simple question: for all of the money we spend on gifts around the holidays, are our recipients appreciating the expense?

The short answer?  No, not really. To measure this, Professor Waldfogel asked 86 of his undergraduate students about whether they liked their Christmas presents. But he’s a practitioner of the dismal science, so he had to phrase that in a cold-blooded manner—how much would they have paid for those presents if they went out and bought them personally?

The results confirmed what many of us have felt for years. Students estimated their presents cost around $438, but admitted they only would have paid around $313 for them in total. On an individual level, that’s a value destruction of nearly 29%–almost a third of what we spend on our gifts goes unappreciated!

With a value that high, Professor Waldfogel set out to replicate this later in the year. He phrased the question slightly differently this time around, though. Instead of asking the students what they would pay for the presents they received, he asked them what their “indifference point”—the tipping point where they could go either way—was between receiving the gifts and receiving cash in lieu of the presents. This group of students estimated their presents cost around $508 on average, and would have accepted $462 in cash instead. A smaller difference to be sure, but still indicative of massive value destruction in our gift-giving traditions.

Sentimentality Matters


When Professor Waldfogel released his results in the mid-1990s, he caused an understandable stir in both popular culture as well as academia. Economists were split on his take of things, with many acknowledging this type of research to be the primary reason people loathe economics to begin with. But one part of his methodology is worth further examination—he specifically told his students to ignore the “sentimentality” component of the gifts and only consider the product itself.

Anyone who has a relic from their childhood sitting on their office desk or a hat from their dad hanging up on the coat rack can see the issue with this methodological assumption. We value certain gifts precisely because of their sentimental value. The tradition of gift-giving itself is rooted in sentimentality and reciprocity. And our behavior of returning gifts bears this out as well—we are far less likely to return gifts given to us by our siblings, parents, and partners than we are more distant relatives and friends.

So if you’re considering what gift to give your son, wife, or brother, don’t worry too much about it. The sentimental value of your thought is almost certainly going to be the most important consideration of your recipient, so unless you really bomb this one, you’ll probably be fine. But if you’re thinking about that distant cousin, nephew, or office friend, remember the research here, and think about what you can give someone to match their implicit preferences more precisely.

Cash, Gift Card, or Present?

Professor Waldfogel may have been characterized as a Scrooge-ish character in this whole debate, but he didn’t exactly unearth an unknown phenomenon in our gift-giving tradition. We all know the feeling of spending the time and money shopping for that ideal present for a special one, only to feel a bit let down by their well-intentioned but lackadaisical response upon opening it up. The personal finance blog “Budgets are $exy” ran through a comprehensive list of reasons we can swing and miss on giving presents. The variables include:

  • The recipient’s age
  • Their relationship to you
  • Intimacy of the relationship
  • Budgetary constraints
  • Timing considerations
  • Previous gifts given
  • Risk tolerance

That’s a ton of variables to keep in mind for the simplistic goal of giving someone a gift they’ll enjoy. Grandparents seem to get this—nearly 40% of them now just hand out cash. But grandparents are grandparents, so they seem to get away with pretty much whatever they want to do anyways. They’re the Greatest Generation—just enjoy that $20, dang it.

For the rest of us, cash presents offer a bit of a sticky situation. Is it a bit forward to just ask for cash?  Couples tend to deal with this issue constantly, particularly as millennials are increasingly getting married and dealing with high existing levels of debt. A recently engaged woman asked the New York Times Social Q’s blog for some help with this concise yet complicated question:

“Being one of a dozen cousins, I have been to many family weddings. They have been ostentatious, wasteful affairs, in my opinion, with thousands of dollars thrown away on useless revelry and gifts. I am the last cousin to marry, and my relatives expect the same from me. But my fiancée and I don’t need toasters or linens. We need a down payment on an apartment. We think putting our money toward that is more prudent than buying a fancy wedding dress of floral arrangements. Is there a nice way to tell our families this and still reap the rewards of a wedding (in cash)?”

Her question deals with a couple primary issues at hand. First off, the model of a wedding as the communal means of forming your household is an increasingly antiquated concept as more and more millennials cohabitate before marriage. Secondly, asking for cash as a present creates a distinctly transactional vibe to gift-giving. The tradition of gift-giving goes back ages; it represents a time-honored manner of building relationships and reinforcing communal foundations. Morphing it into a purely transactional relationship strips it of its meaning and sullies its very purpose.

With all of this in mind, it’s no surprise that gift cards have skyrocketed in popularity over the past decade. They serve as a lovely intermediary between gifts and pure cash. Back in 1999, the industry stood at a relatively meager $19 billion; by 2018, it’s projected to exceed $160 billion. Gift cards now stand as the most popular form of present for holidays or other occasions, and that trend looks to accelerate further with the meteoric rise in electronic gift cards.

Efficiency Begets Waste

If Professor Waldfogel was concerned about efficiency losses in gift giving, however, he would be appalled at the current state of the gift card industry. While the industry has grown rapidly over the past two decades and is forecast to continue to grow steadily at 6% per year, wasted balances have grown in commensurate fashion. Federal legislation has stemmed some of this waste by barring certain types of fees and expiration dates, but unused gift card balances continue to stand at nearly $1 billion per year. And lest you think this is a nice revenue source for one of your favorite retailers, keep in mind that accounting rules dictate these unclaimed balances eventually get turned over to the state. So all in all, your aunt’s thoughtful move to allow you to choose your favored gift turns into a bit of a giveaway to Uncle Sam when it’s all said and done.

Our Business Model

That’s where we come in. At EJ Gift Cards, we think it’s a travesty that your aunt, cousin, or friend from work won’t have their wishes for your happiness honored with that gift card they sent over. Gift-giving is a deeply honored tradition that drove integral parts of our human evolution, and inefficiencies in the market structure stand in the way of us honoring that heritage. If you can’t find a way to use that present, you should be able to sell your gift card and direct the universally applicable cash to anything else you desire. Our model works pretty simply to deal with this issue:

  • Step 1: Let us know what card merchant it is with and the available balance that remains on the card.
  • Step 2: We generate an instantaneous offer for that card based on a few key variables.
  • Step 3: You decide what you’d like to do—keep it or sell your gift card to us and receive cash via paypal for it.

Our process is secure, easy, and quick to complete from start to finish. We want you to honor the intentions of that well-meaning gift-giver by redeeming their gift card for a useful infusion of cash into your budget. And as always, there’s no pressure to accept our offer. You can test it out today and see exactly how much that old gift card could be worth. After all, it’s probably better for it to get put to use than live in your wallet, George Costanza-style.

Remember our Professor

The professor never wanted to be remembered for Scroogenomics. He just wanted to point out the difference between our intentions as gift-givers and our value perceptions as gift-receivers. And while his methodology and results have been questioned by others in the field, they point out a resounding truth—we’re kind of bad at giving gifts, and people prefer cash or gift cards more often than not.

Asking for cash still seems like a slap in the face to the gift-giving tradition, though, so the rise in gift cards has met this market need—but myriad waste continues to survive within the system. Our goal is to wring that waste out, compensate you for that old gift card that is otherwise useless to your needs, and keep this tradition of gift-giving moving forward into the modern age without Uncle Sam dipping into the equation. Think of us as the fixer in your gift-giving relationships. That imbalance between intention and perception might still exist, but our model helps you lower it each time you use our service. Whether it’s a Christmas gift card for a restaurant 50 miles away or a birthday gift card with only a few bucks left on it, we can offer you top dollar for nearly any merchant or business card.

So give it a shot, and see if you can sell us your gift card today. There’s no downside for you, and at the end of the day, this service can help your uncle actually succeed at giving you something you wanted all along—cold hard cash.