Intertemporal Extrapolation of the Deadweight loss of Christ

In The Deadweight Loss of Christmas, Joel Waldfogel concludes that from a microeconomic perspective on consumers’ choice, gift-giving creates a principal-agent problem, where the giver (agent) may not be fully informed of the recipient’s (principal’s) need, and potentially results in deadweight loss. The loss is as large as between 10 percent and a third of the value of the gift. The size of the deadweight loss has a negative relationship with the giver’s acquaintance with the recipient’s preference and a positive correlation with the recipient’s knowledge of her own preference. However, while the analysis of Waldfogel is largely true in a single-period model, which he has employed, the loss may be significantly smaller if a multi-period model were to be applied. Possible errors in data collection in the survey that his argument was based upon also brings about doubts in his analysis.

Firstly, a self-adjustment mechanism performed by the recipients may minimize the deadweight loss created. This cannot be demonstrated in a single-period model. In Figure 1, Waldfogel illustrates that the deadweight loss is originated from a difference in the bundle the

recipient will end up with if the giver were to give him cash gifts (Point II) and non-cash gifts (Point III), where Point III lies on a lower indifference curve than Point II. However, if we extend this to a two-period model, it can be speculated that the recipient will change her consumption pattern accordingly. For instance, suppose the recipient consumes at the bundle (a, b) in a period, where a stands for gift goods, b stands for non-gift goods. If the bundle at Point II is (10, 10), and that of Point III is (12, 8), the recipient may well borrow money to buy two units of non-gift good, and save two units of gift goods for the next period, so that the bundle consumed in period 1 remains at Point II. In the next period, instead of buying at (10, 10), the recipient will buy at (8, 10), and make use of the two units of gift goods she saved in the Period 1, so that the bundle consumed in Period 2 remains at (10, 10). In this case, the consumption pattern is not affected by the act of gift-giving.

This self-adjustment mechanism may eliminate the deadweight loss of consumption, however, it gives rise to another type of deadweight loss, which is created through the act of borrowing in order to maintain her consumption pattern. The type of deadweight loss caused, in money terms, is thus the interest payment. Nevertheless, the self-adjustment model is over-simplified, a

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