The Christmas shopping season is under way, and no doubt at least some of your loved ones are difficult to shop for. Many of us turn to what seems to be the perfect solution: the gift card. Not so fast, says Tim Harford in a 2007 article. Economically (and sentimentally) speaking, gift cards just don't make sense. The article is reprinted below.
Christmas is coming, so what do you buy the loved one who has everything? One possibility is the gift card, an electronic version of the traditional gift certificate that has taken the world by storm over the past decade. The popularity is odd: This is a gift that combines the can't-lose flexibility of a hideous cardigan with all the charm of a rumpled 10-spot slipped into a Christmas card.
Dismiss my complaints, if you will, as unwarranted generalizations from personal experience. I have had one instance of gift cards as a recipient and one as a giver, and neither was a success.
When my family lived in Washington, D.C., a lunch guest once handed us a gift basket that included a $50 gift card for Bed, Bath & Beyond. It was awkwardly generous—especially to Bed, Bath & Beyond. My wife and I never did find the shop. And when we gave Borders gift cards to a niece and nephew, we later discovered that the nearest Borders was an hour and a half's drive away from their home.
This is typical enough. Last year, the research outfit TowerGroup estimated that 10 percent of spending on gift cards in the United States was wasted because the cards expired or were lost without being redeemed. And it gets worse: Many cards are redeemed only after being sold at a loss by the original recipient.
Economist Jennifer Pate Offenberg has taken a look at the resale market on eBay. She concludes that a thriving resale market exists—but the typical seller accepts a 15 percent loss on the face value of the card, in addition to the cost and hassle of listing on eBay. Rather than give your loved one a $25 gift card, why not give them a $20 bill and flush the extra five bucks down the toilet?
Faced with facts like this, one cannot help but recall the economic discipline's most famous "Bah, humbug!" result: Joel Waldfogel's discovery, in 1993, that the typical $50 Christmas gift is valued by the recipient at between $35 and $43. It is this sort of finding, presumably, that accounts for the popularity of gift cards, which, according to Offenberg, are now the most popular gift in America.
But despite the fact that Waldfogel's "deadweight loss of Christmas" is dragged out each December like last year's decorations, it is rarely acknowledged that he explicitly excluded sentimental value from his calculations. The implication of his work is not that Christmas is worthless, but that if you're careless with your gifts, the sentimental buzz had better be pretty good.
It is not clear why gift cards—which seem to offer a comparable deadweight loss to regular gifts, and surely less sentimental value—have caught on. But if you must buy one, Offenberg has some advice.
She suggests choosing a card from a store at which almost anyone can find an excuse to spend money. Her eBay research found that cards from Office Depot, Wal-Mart, and Starbucks were highly valued on the secondary market. It might seem more romantic to proffer a gift card to buy slinky underwear or jewelry, but cards from Victoria's Secret and Tiffany bombed on eBay, reselling at roughly a 20-percent discount.
Better still, why not buy a thoughtfully chosen but modest present? If an inexpensive gift turns out to be the wrong choice, not much loss. And if you feel you should be spending more money, you can always slip a check into the package.