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Solving the Holiday Cash Conundrum

by Travis Pantin
Tue, 11 Dec 2007 at 1:15 AM

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"The deadweight loss of Christmas" is an example commonly used by economics professors to illustrate a certain kind of market inefficiency.

The example goes like this: Suppose Tim spends $50 on a present for Sally, but Sally would only have been willing to buy the same thing for herself if it were $40 or cheaper. In such a transaction, $10 of value is effectively lost — Sally would have gotten more value from Tim if he had just given her a $50 bill.

But "cash is often perceived as cold and hard, a gift signaling that little or no thought went into it," economics blogger Ben Muse writes. "That's bad if it really is the thought that counts."

There may be a way out of this conundrum though, Mr. Muse suggests: retail gift cards.

Those little plastic cards with the magnetic strips "could signal that some thought went into the gift," he writes. "It may be easier for the gift-giver to identify the general category of gift (hardware, clothes, stuff from Wal-Mart) that the recipient would like than to pick the perfect gift. If so, the value the recipient places on the gift might be relatively close to its price."

Mr. Muse directs his readers to a paper by an assistant professor of economics at Loyola Marymount University, Jennifer Offenberg, that deals with this very question.

Ms. Offenberg found that a lively resale market for gift cards exists on eBay. After observing the resale prices of the cards, Ms. Offenberg determined that "taking the sales price and the selling costs together, a fair estimate would be that gift cards have a cash value 20 percent lower than their face value to recipients."

As a result, about $16 billion of gift money will end up as deadweight loss this holiday season, she estimates.

Her studies disclosed that gift cards from certain stores come much closer to their face value. Cards from Home Depot, Lowe's, Office Max, Circuit City, and Starbucks had a resale value that was much closer to their original price. By contrast, cards from stores such as Tiffany & Co., Victoria's Secret, and American Eagle had much lower resale values.

Ms. Offenberg posits that although gift cards might produce less deadweight loss than physical presents, cash gifts are still superior.

Ever the economist, she comes to this conclusion: Because cash produces "a larger increase in the recipient's utility than a gift card," economically minded givers should present their loved ones a wad of bills "with a note to the recipient suggesting that the money could be spent at [insert name of store here] — to add the thought that counts."

Fuel Efficiency
On Market Movers, Felix Salmon makes the interesting point that American fuel economy isn't suffering because American cars are becoming less fuel efficient.

"If you keep size and weight constant, cars are much more efficient now than they were 20 years ago," Mr. Salmon writes. "It's just that no one's been keeping size and weight constant."

He sees this trend as a reason why Congress should pass fuel economy standards: "Without them … any improvements in efficiency will always be wiped out by 'improvements' in size and power."

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