Children and the Economics of Christmas Gift-Giving

Applied Economics Letters, 1995, 2, 295–297

Children and the economics of Christmas gift-giving

CAR OL HORT ON T RE M B L AY* and VIC T OR J. T R E M BL AY *

Oregon State University, Department of Economics, Ballard Extension Hall 303, Corvallis, OR 97331-3612, USA Received 22 March 1995

In spite of its importance to the retail sector, there has been relatively little research on the economics of Christmas Season gift-giving. The one exception is Waldfogel (1993), The Deadweight loss of Christmas, American Economic Review, 83, 1328–1336, who found a substantial amount of deadweight loss associated with Christmas gift-giving. Here it is shown that the Waldfogel study is incomplete and alternative models of consumer choice theory which better explain Christmas gift-giving are identified. Although the standard neoclassical and altruistic models predict no relationship between the population of children and per capita Christmas spending, a model is developed that includes non-pecuniary externalities and predicts that children have a positive impact on Christmas gift-giving. This prediction is supported by empirical evidence.

I. I NT R ODUC T ION II . T HE E C ONOM IC S OF GI F T- GI VIN G

Holiday or Christmas season gift-giving is very important to The economics of gift-giving is rather elementary in the neoclassical the retail sector of the economy.1 For example, US retailers world found in most intermediate textbooks. In this setting, normally generate 25% of sales and 60% of profits between consumer preferences are represented by an increasing, twice Thanksgiving and New Year’s Day (Fortune, 1985; Business continuously differentiable, and strictly concave utility function, Week, 1993). U(x), where U is total utility and x is a vector of consumer In spite of the importance of the Christmas season to the goods. By assumption, there is no sentiment, regret (Thaler, retail sector, there has been relatively little economics research 1980), or interdependent utility functions (Leibenstein, 1950). done on this subject. The one exception is Waldfogel (1993), who Since any one person’s utility function does not depend upon the found a substantial amount of deadweight loss associated with utility or consumption bundle of anyone else, gift-giving will not Christmas gift-giving. The Waldfogel study presents an incomplete occur. This is because the act of giving a gift reduces the giver’s picture of the subject, however, since it assumes that the only consumption opportunities without providing any compensating motivation of gift-giving is altruism. benefits. Thus, the institution of Christmas gift-giving will not In the sections that follow, we provide a more general exist in a simple neoclassical world. discussion of the economics of gift-giving. In particular, we Gift-giving can be explained, however, by extending the discuss neoclassical, altruistic, and paternalistic motives for gift- model. In the first extension, a consumer may give to others if giving. Although the standard neoclassical and altruistic models the consumer has altruistic preferences. To illustrate, consider predict no relationship between the population of children and a setting with two individuals i and j, where Ui equals i’s total per capita Christmas spending, we develop a model that includes utility and Uj equals j’s total utility. Individual i is defined to be non-pecuniary externalities and predicts that children have a altruistic if Ui = Ui(xi, Uj) and ¶ Ui/¶ Uj > 0. Gift-giving is possible positive impact on Christmas gift-giving. This prediction is in this case and will occur if the gain in utility from giving a gift supported by empirical evidence. exceeds the lost utility associated with the cost of the gift.

*The authors are currently Honorary Fellows, Department of Economics, Social Science Building, 1180 Observatory Drive, University of Wisconsin, Madison, WI 53706-1393, [Phone: (608) 238-7569; FAX: 608-262-2033]. 1Following most retail advertisers, reference to Christmas gift-giving is taken to include Hannukkah and other holiday gift-giving customs.

The altruistic model is also a poor predictor of most gift-giving Christmas gift-giving (yi*) is a function of the exogenous elements behaviour, however, because it can only explain cash gifts. A of the maximization problem: physical gift from i to j that costs $100 will more than likely leave yi* = yi*(m, t ) j worse off than if j instead used this $100 to purchase a utility- One would expect Christmas gift-giving to be a normal good and maximizing good (xj*). Thus, unless i is perfectly informed or ¶ yi*/¶ mi to be positive. Note that in this specification the consumer lucky (i.e. i purchases xj*), i will maximize Ui by giving a cash may give a cash or in-kind gift, which may be motivated by rather than an in-kind gift.2 However, Waldfogel’s (1993) survey altruism or paternalism or by the fact that the giver receives indicates that over 88% of all Christmas gifts are in-kind rather direct ‘warm glow’ benefits from giving (Andreoni, 1990). Those than cash. This suggests that Waldfogel’s altruistic model is with a greater taste for giving will spend more on Christmas gifts, inappropriate and casts doubt on his conclusion that Christmas and we hypothesize that this taste will be associated with gift-giving is highly inefficient. Further, how could the institution household composition, i.e. the number of children.5 of Christmas gift-giving evolve and persist if it were so inefficient?3 There are several reasons why children may generate positive A second extension better explains in-kind giving. In this case, spillovers when it comes to Christmas gift-giving. First, the the consumer is assumed to have paternalistic preferences, where shared experience of children opening presents on Christmas i is defined to be paternalistic if Ui = Ui (xi, xj) and ¶ Ui/¶ xj > 0. morning can enhance the parent’s direct or warm-glow benefits Individual i will give an in-kind gift to individual j if the gain from giving. Second, as discussed above, if individuals feel in utility from giving the gift exceeds the lost utility associated more responsible for the development of children than others, with the cost of the gift. Now, if i cares about which commodities then they will be more inclined to give gifts to children that j consumes, i will give gifts to j in order to maximize i’s utility enhance the child’s human and consumption capital (Stigler and rather than j’s utility. This paternalistic gift-giving motive will Becker, 1977). Third, gifts from children may create other most likely be associated with children. For example, a parent positive externalities that further enhance Christmas gift-giving. may strongly prefer to give a child a classic novel rather than a For example, a child may give a grandparent a piece of dried clay comic book, cash, or an ounce of cocaine because such a gift boosts with an imprint of the child’s hand that has a very high sentimental the child’s human capital. Clearly the institution of Christmas value to the grandparent in spite of its low cost of construction.6 in-kind giving can exist in a paternalistic world.4 Such sentimental gift-giving may induce the grandparent to give more to the child (Cox, 1987) would call this an exchange- related motive for giving). Thus, if paternalistic, warm glow, and II I. CHR IS T M AS S PE ND ING AND CHI L DR E N other external benefits are important determinants of gift-giving and if these benefits are greater when the recipient is a child rather In addition to paternalism, there are a number of reasons why than an adult, then Christmas gift-giving will increase with the children would have a positive influence on gift-giving. To number of children. In contrast, the simple neoclassical and illustrate, assume for simplicity that individual i’s utility is a func- altruistic models do not provide a clear connection between gift- tion of a single numeraire good (xi), total spending on Christmas giving and children. gifts for others (yi), and consumer tastes (t ): Ui = Ui(xi, yi, t ). In order to provide a simple test of these hypotheses, we Individuals are endowed with purchasing power or income (m) estimate Equation 1. This requires several additional assumptions. which they allocate between x and y. Thus, each consumer faces First, we assume that Equation 1 can be derived from a single the following problem: representative consumer. Thus, per-capital Christmas spending is modelled.7 Second, purchasing power is assumed to be captured max U = U (x , y , t ) by real per-capita income. Third, consumer preference for x , y i i i i i i Christmas gift-giving is assumed to be captured by the percentage subject to xi + yi = mi of the population that is Christian8 and by the percentage of the The solution to this problem shows that the optimal amount of population under the age of 18. Finally, we specify Equation 1

2We assume that consumer i gives just one gift to consumer j and that individuals are not risk-loving. By assuming a sufficiently risk-loving giver, one can also explain why an altruist may give an in-kind instead of a cash gift. 3For example, Demsetz (1967) argues that institutions can emerge for efficiency reasons and Alchian’s (1950) work suggests that such institutions can only survive in the long run if they are efficient. This would imply that the institution of Christmas gift-giving could only persist if Waldfogel’s analysis is incomplete. 4Of course, gift-giving may be explained by adding constraints rather than by modifying the utility function. For example, social or religious customs or pressure may be so constraining that even a Scrooge gives gifts to others. Furthermore, even the strong paternalist may give a cash gift if poor health precludes shopping. 5Traditional demand analysis indicates that the model should also contain the price of Christmas gifts. Because all commodities are potential Christmas gifts, however, real income is used to capture the effects of both income and aggregate price changes. 6In addition to the emotional benefits themselves, grandparents might appreciate the effort of the child in making a gift as opposed to buying a gift. This argument parallels that of dissonance theory, where a person’s value of a commodity is directly related to the personal effort required to obtain it (Aronson and Mills, 1959; and Gerard and Mathewson, 1966). Here we are arguing that the value of a gift to the recipient is related to the effort required to produce it by the giver. 7See Deaton and Muellbauer (1980) for a discussion of the limitations of this approach. Children and the economics of Christmas gift-giving 297

as a logarithmic function: model predicts that all gifts will be in the form of cash. This is inappropriate, however, given that Waldfogel finds that over

1n(CHS) = b 0 + b 1 1n(Y) + b 2 1n(PERCHRIS) 88% of Christmas gifts are in-kind. + b 3 1n(PERCHILD) (2) We develop a more complete model, one that allows for altruistic, paternalistic, or warm glow motives for giving, which where: predicts that consumers may give cash and in-kind gifts. Our CHS = real per-capita Christmas spending in the US empirical results show that spending at Christmas is a normal good. Y = real per-capita income We also find that Christmas spending increases with the number PERCHRIS = the percentage of the population that is of children, supporting the hypothesis that children generate Christian positive gift-giving spillover effects. PERCHILD = the percentage of the population under the age of 18. The same includes 40 annual US observations from 1951 to ACK NOW L E DGE M E NT S 1990, and all dollar figures are in 1983 dollars.9 The ordinary-least-squares regression results of Equation 2 The authors would like to thank Joel Waldfogel for helpful are presented below (absolute value of t-statistics are in parentheses): comments on an earlier draft of this paper and Diana Goodwin for providing valuable research assistance. 1n(CHS) = – 2.510 + 1.4291n(Y) – 0.8791n(PERCHRIS) (1.337) (6.500) (1.025) RE FE R E NC E S + 0.9331n(PERCHILD) Alchian, A. (1950) Uncertainty, evolution, and economic theory, Journal (2.000) of Political Economy, 58, 211–21. - Andreoni, J. (1990) Impure altruism and donations to public goods: a R 2 = 0.707 F = 32.332 DW = 1.956 theory of ‘warm-glow’ giving, Economic Journal, 100, 464–77. Aronson, E. and Mills, J. (1959) The effects of severity of initiation on As expected, per-capita Christmas spending is a normal good. liking for a group, Journal of Abnormal and Social Psychology, 59, 177–81. The impact of per-capita income is positive and significantly Business Week (1993) Not a Ghost of a Chance of Christmas Past, different from zero at conventional significance levels. The 11 October, p. 35. percent Christian has a negative effect on Christmas spending. Cox, D. (1987) Motives for private income transfers, Journal of Political This may imply that church-going Christians are less materialistic Economy, 95, 508–46. during the Christmas season than others. In any case, the parameter Deaton, A. and Muellbauer, J. (1980) Economics of Consumer Behavior (New York: Cambridge University Press). estimate is not significantly different from zero. Most importantly, Demsetz, H. (1967) Toward a theory of property rights, American the empirical results provide support for our a priori expectation Economics Review, 57, 347–59. that children have a positive and significant effect on Christmas Fortune (1985) Discount Christmas, 21 January, p. 8. gift-giving.10 A 1% increase in the percentage of the population Gerard, H. B. and Mathewson, G.C. (1966) The effects of severity of under 18 raises real per-capita Christmas spending by approximately initiation on liking for a group: a replication, Journal of Experimental Social Psychology, 2, 278–87. 1%. This is consistent with the paternalistic, wa rm glow, and Leibenstein, H. (1950) Bandwagon, snob, and Veblen effects in the theory other sentimental motives for Christmas gift-giving. of consumers’ demand, Quarterly Journal of Economics, 64, 183–207. Stigler, G. J. and Becker, G. S. (1977) De Gustibus Non Est Disputandum, IV. C ONC L UDI NG R E M ARK S American Economic Review, 67, 76–90. Thaler, R. (1980) Toward a positive theory of consumer choice, Journal of Economic Behavior and Organization, 1, 39–60. We have shown that there are several models of consumer choice Waldfogel, J. (1993) The deadweight loss of Christmas, American which can explain Christmas gift-giving. For example, the altruist Economic Review, 83, 1328–36.

8Because of Hanukkah, the percentage of the population that is Jewish may also influence Christmas season gift-giving. These data are not available for every year of the sample, however. 9Christmas spending is defined as aggregate fourth quarter retail spending minus the average quarterly retail spending for each year. These data were obtained from the Current Business Reports: Monthly Retail Trade, Sales, and Inventories, US Bureau of the Census. Per capita income is defined as disposable income, obtained from the Survey of Current Business, divided by total US population, obtained from Handbook of Labor Statistics, US Department of Labor Statistics. The Christian population includes all who regularly attend a Protestant or a Catholic church. These figures were taken from the Statistical Abstract of the U.S., US Department of Commerce, Bureau of the Census. The under 18 year old population figures were taken from the Handbook of Labor Statistics, US Department of Labor, Bureau of Labor Statistics and Historical Statistics of the U.S., Colonial Times to 1970, US Department of Commerce, Bureau of the Census. 10Since per-capita wealth and the real interest rate would also affect the purchasing power of the representative consumer, Equation 2 was also estimated with these variables. Because of multicollinearity, however, the wealth and interest rate variables were never significant. Equation 2 was also estimated without PERCHRIS. The parameter estimate on PERCHILD remained positive and significant in each of these alternative specifications.