Saturday, 24 December 2011

How the Internet Can Reduce the Deadweight Loss of Christmas

So far I’ve managed to blog at more than the frequency I intended, by just writing about things that arose naturally from whatever I was doing. So what to write when I am, along with most, preoccupied with Christmas? As a macroeconomist, you might imagine that I would be wondering whether Christmas shopping will be enough this year to prevent a double dip recession, or something like that. But whenever I see crowds Christmas shopping, I think of the following paper: Waldfogel, J (1993) ‘The Deadweight Loss of Christmas’ American Economic Review Vol. 83 pp. 1328-1336. 
                Predictably for an economist, this paper tries to calculate the amount that is wasted by people trying to guess what other people might like, and getting it wrong. We all know this happens – look at the queues at return desks in early January.  The paper estimates that between a tenth and a third of gifts are wasted (or more precisely, the average $10 gift is worth at best $9 to the recipient). What is more, there is the time spent trying to decide what to give. Sometimes people drop hints – but in June, not December, and you have to write it down somewhere, and then worry that by now they might have bought it for themselves.
                So far, so Scrooge like. The economist's answer is of course to give cash (deadweight loss = 0), or just ask people precisely what they want. But cash kind of misses the point, and when I’m asked what I want for Christmas my mind goes blank.  Yet we now have the tool to reduce this loss dramatically: the wishlist posted somewhere on the web. If this is kept up throughout the year, it can largely eliminate deadweight loss, and maintain an element of surprise.
                In this context I thought about Tyler Cowen’s book The Great Stagnation. One of the ideas here is that the period of rapid technological innovation has past. Compared to the burst of innovation in the decades around 1900, in the last few we really only have the computer and the internet. This may be right, but the benefits of the internet are pervasive, and some – like this one – will not show up in GDP, but are important nevertheless. Merry Christmas!

1 comment:

  1. Simon, I came across your blog while browsing regarding the topic of Christmas gifts. It was a lovely read, but with reference to your suggestions of reducing this deadweight loss:

    1. Having an online wishlist: Pinterest has perhaps proven to be an online wishlist that is both easy to access and easy to fill. As a (slightly extreme) example, a man successfully planned his bride's dream wedding purely from her Pinterest board.

    2. Giving cash: Perhaps a cultural suggestion could solve this quandary. The Chinese (and Japanese) give Red Envelopes of cash during celebrations, and this practice has since been adopted by the Vietnamese, Burmese, Cambodians, Koreans, Filipinos, and even the Muslim Malays of South-East Asia. Perhaps it is only a matter of time before this more efficient alternative spreads to the US and the UK?

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