Academic journal article Economic Inquiry

Christmas Economics-A Sleigh Ride

Academic journal article Economic Inquiry

Christmas Economics-A Sleigh Ride

Article excerpt

I. INTRODUCTION

Santa Claus--a benevolent dictator aiming to bring love and joy to everyone celebrating Christmas--is now back at the frosty North Pole after enjoying the Caribbean sun all summer long. Santa doubts whether his Christmas activities are still meaningful and welfare-enhancing nowadays, as his business model has changed significantly over the last decades: The interest in the traditional wooden product portfolio has been declining, minimum wages have been introduced north of the Arctic Circle, and doubts about his existence have been raised. Therefore, he has asked his Christmas Economic Advisors (CEA)--Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner, and Blitzen together with the chairman Rudolph--to prepare an economic report on Christmas.

In a meeting of the CEA with Santa and the team of elves, Rudolph presents the key results. He has set a simple agenda: First, he discusses economic aspects of charitable giving and presents. Second, he explains the effect of Christmas on prices and the business cycle. Finally, Rudolph summarizes the main findings of the CEA report and concludes.

II. HOMO SANTA CLAUSICUS-THE ECONOMICS OF PRESENTS

A. Do They Know It's Christmas?--Charitable Giving

"Christmas is not only the season of love, but also the season of gifts," Rudolph says. "People are more generous around Christmas, not only under the Christmas tree." For example, church donations are higher at Christmas. Using data from a Catholic church in a major Midwestern city, Cairns and Slonim (2011) examine substitution effects across donations, specifically, the effect of second collections on first collections. They find that churchgoers donate roughly one-third more at Christmas. By using data on consumer tipping behavior from a busy restaurant, Greenberg (2014) finds that during the holiday season tipping rates are higher.

Santa seems pleased, attributing this effect to his gift-giving and Rudolph can confirm this assumption. Falk (2007) finds in an experiment where solicitation letters--some without a gift and some with a gift--were sent to potential donors that the frequency of donations was significantly higher for those who received a gift. Therefore, Santa suggests that children should maybe send him a small gift with their wish list.

B. The First Joel--Deadweight Loss of Christmas

"The main concern of economists regarding Christmas is the potential welfare loss of presents," Rudolph explains. "This was first put forth by Joel Waldfogel (1993) who finds that gift-giving is a waste of resources, as recipients value gifts less than the gift-givers have spent on them. For instance, your grandma gives you a jumper worth $100, which you value only $30. The so-called welfare loss is $70, as your grandma spent $70 more than the jumper is worth to you. The deadweight loss is actually a sign that gift-givers are not very good at predicting which gifts the receivers will appreciate." Waldfogel (1993) conducted two surveys regarding Christmas presents with his students, asking for the maximum amount the students would be willing to pay (WTP) for the gifts and the minimum amount the students would be willing to accept (WTA) in compensation for the gift. The true valuation of a good is normally bounded by these two extremes, the WTA and WTR Waldfogel estimates that in-kind gifts lose 10%-33% of their value compared to cash. On average, his students value the gifts they receive 13% less than their estimated costs.

This started a lively debate among economists whether and to what extent in-kind gifts actually entail a deadweight loss. Asking for the WTA, Solnick and Hemenway (1996) find a 214% welfare gain. List and Shogren (1998) conducted an experimental auction where the subjects indicated at which price they were willing to sell their gifts. They find on average a 130% welfare gain. Principe and Eisenhauer (2009), focusing on the actual price rather than the recipients' estimated costs of the present, find an average deadweight loss of more than 7%. …

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