Friday, February 3, 2012

The deadweight loss of gift certificates

Giving gifts in kind induces large deadweight losses, as I discussed in one of my very first blog posts. The basic idea is that people do not value their gifts as much as they would be willing to spend on, or at least that they would have spent the cost of the gift in a Pareto-improving way. If instead of receiving a gift in kind one obtains a gift card, the added flexibility should give us a small to negligible deadweight loss. I would compare this to an incomplete market that can get close to complete, in well-being, with very few securities like government bonds.

Flóra Felsö and Adriaan Soetevent study spending habits of gift certificate recipients. They find that the vast majority is not really constrained by having to buy at a particular merchant and only alter a little bit the timing of their purchases. One in seven (more among females), though, considers the gift certificate separately from the budget constraint and buys something one could not afford. While these people are happy about it, there is obviously still a loss in well-being. Indeed, if they want this purchase so much, they would have bought it from the "normal" funds. All in all, the deadweight loss from gift certificates does not seem important.


Juan Jose said...

Interesting thoughts. Can this reasoning be extrapolated to social programs for poor people? Does transferring food in kind has higher DWL than Conditional cash transfers programs (alike gift certificates)? Do you know previous studies showing this effect? Probably this is another positive effect from CCT.

Jian Shen said...

In China, we give cash directly on important occasions (wedding, etc.)

Economic Logician said...

For cash versus in kind transfers, see my previous post.