The Inefficiency of Gift Giving on Diwali
Gift-giving is an essential part of Diwali, whether it involves a husband presenting a necklace to his wife during Parva, a brother gifting a large Dairy Milk to his sister on Bhaiduj, or the myriad ways people exchange dry fruits. At a certain juncture, the traditional Diwali dessert, Sonpapdi, had become so widely regifted that it earned the title of an informal champion in this practice. It traversed through numerous households akin to a well-seasoned traveller, leaving behind a delightful trail of sweet perplexity.
Although the social impact of giving gifts on Diwali is readily apparent and commonly discussed, but its economic impact is often ignored. At this point of time after, it is essential that our culture re-assesses our relation to gifts and their economic impact.
The traditional view of the economics of gift-giving is based on macroeconomics. It states that gifting is beneficial as it stimulates the economy by introducing a huge amount of spending. But this view has become more and more challenged over time.
Transitioning from the traditional macroeconomic perspective that deems gift-giving as economically beneficial, Joel Waldfogel’s groundbreaking 1993 paper, “The Deadweight Loss of Economics,” introduced a paradigm shift. In this altered viewpoint, Waldfogel’s analysis revealed the inefficiencies of the exchange process, bringing to light the concept of deadweight loss.
In microeconomics, deadweight loss arises from market inefficiency when supply and demand are unbalanced, often due to interventions like price controls, monopolies, or taxes. This results in mispriced goods, influencing consumer and producer behaviour and causing negative economic impacts. This often leads to a reduction in the quantity of items traded, causing unrealized gains from trade and an overall welfare loss for society.
Joel Waldfogel contends that the disparity between individuals’ valuations of received gifts and their market prices results in a significant deadweight loss, questioning the economic efficacy of festive exchanges.
This effect was studied in India by the researcher Parag Waknis in the study, “The Deadweight Loss of Diwali Gift Giving” in which 73 students from Kohinoor Global Campus (Pune) were surveyed about the various Diwali gifts that they had received throughout their life. They were asked “How much money would you have been willing to pay if you were to buy this product on your own” for all the individual gifts and it was seen that on average, the respondents were willing to pay 15% less than market value of the products gifted.
We can see that this effect is not limited to India and Diwali by looking at Joel Waldfogel’s own study where he surveyed 86 economics students at Yale about the same topic, it was concluded that gifts incurred a deadweight loss of 10–33% in the economy depending on way the survey questions were phrased.
It was also observed in both studies that the lowest deadweight loss was created in situations where people had closer relationships (like closeness of two siblings compared to the relatively distant relation between an uncle and a nephew) and romantic relations or the relationships where someone knows the other person better than they know themselves were even known to produce positive value after gifting rather than dead weight loss. When comparing both studies, it can be observed that there are cultural differences between India and America in which relations are considered close. For example, In the study conducted in Yale, it was seen that gifts from Grandparents created one of the highest deadweight losses on average whereas in India grandparents had one of the lowest deadweight losses in their gift giving.
We can clearly see the inefficiency of the gift giving system when laid bare like this. While this economic analysis doesn’t advocate for discontinuing the tradition of gift-giving, it acknowledges the inherent value of building relationships through this practice, extending beyond the realm of deadweight loss considerations.
Dan Ariely aptly notes that while economically inefficient, gift-giving remains socially efficient. Good gifts have the power to mend relationships, potentially offsetting the overall deadweight loss. It is the recommendation that instead of not giving gifts at all, we should just be more considerate and give each other better and more efficient gifts -
1. Cash Gifts — According to Gregory Mankiw, in terms of their social value gifts are an asymmetric way to signal private information or in other terms it means that since gifts represent something personal to us, the longer someone has spent thinking about you (the more that they love you) the better their gift will be. Thus, gifting cash in a situation where a personal connection like this exists, can cause grievances.
To borrow an example — When someone gifts cash to their boyfriend or girlfriend on their birthday it shows that you haven’t been thinking about them / aren’t able to use gifting to signal private information to them (i.e. it feels as though you don’t love them anymore/don’t think about them anymore), but if a student is gifted cash by their parents they are not displeased because the love they are being shown by their parents is never in question.
2. Gift Cards — It is a slight upgrade from cash gifts as it is still a clear signalling of information about the other person, while minimizing dead-weight loss by giving choices and flexibility to the other person.
3. Communication — Sometimes you should just ask the other person what they would like to be gifted. That often results in the greatest utility for both participants.
4. Avoiding expensive gifts — Avoiding expensive gifts is crucial as there is a direct relationship between the potential deadweight loss of a gift and its price. For instance, a person valuing a ₹100 gift at ₹40 produces a ₹60 deadweight loss. However, a person valuing a ₹10,000 gift at ₹7,000 incurs a ₹3,000 deadweight loss.
In conclusion, while the economic efficiency of gift-giving may be debated, its social and emotional value is undeniable. Instead of halting gift-giving, consider more efficient choices like cash or gift cards, balancing both social and economic aspects. Recognizing relationships with lower deadweight loss emphasizes the need to understand dynamics. It is best not to make oppressive decisions for others; it’s preferable to abstain from gifting than to offer a burdensome “white elephant.” Ultimately, gifting is about balancing economic considerations with fostering meaningful connections, making each present a thoughtful expression of care.
References-
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10. “Your Presence at Our Wedding Is Present Enough”: Lies, Coding, Maintaining Personal Face, and the Cash Gift by Pauline Greenhill, Kendra Magnusson
11. Gift Cards and Gifted Cash: The Impact of Fit between Gift Type and Message Construal by Qing Yao, Rong Chen
12. https://medium.com/@tanayj/why-gift-giving-is-inefficient-but-you-should-do-it-anyway-a916244a4c9c
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15. https://gregmankiw.blogspot.com/2006/12/economics-of-gifts.html?hl=en
16. https://www.wired.co.uk/article/economists-christmas-gift-giving
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20. Image Credit: Bing.com and https://penpoin.com/deadweight-loss/
