The University of Chicago Law School Faculty Blog

Gift Giving and other Transfers

As the Holiday season approaches, Consumer Reports has placed advertisements warning consumers of the waste associated with gift cards, a growing and popular means of getting through birthdays, bar-mitzvahs and now, the Christmas season. Retailers (and some banks) love gift cards because a sizeable fraction are lost or allowed to expire, and many go unused while the vendor enjoys the interest. The value of unused cards has been estimated at $8 billion (though that number appears to be a cumulative stock rather than an annual flow), and there are retailers enjoying millions of dollars in annual income because of unused cards. Note that competition does not reduce the price of cards because of a kind of arbitrage and adverse selection; if $95 gave the recipient a card that could be exchanged for $100 worth of goods, then customers ready to make normal cash purchased would buy cards and quickly redeem them.

From the gift giver’s point of view, the primary alternatives to these cards are (1) “real” and let us assume returnable gifts, (2), cash and (3) no gift at all. Joel Waldfogel’s well-known work on the deadweight loss associated with Christmas has received plenty of attention, and has perhaps encouraged sophisticated readers to prefer gift cards over option (1). I may pretty good at knowing what my kids and their friends will like, and I may even be good enough at this so that gift cards will confer more utility than cash. I may be able to open up a new source of pleasure with a gift. At times, kids know to prefer gift cards over cash, because it removes their parents’ ability to restrict the purchase of video games, for example; at other times, a gift card from Borders, say, simply substitutes for what many parents would gladly provide.

For acquaintances, Waldfogel estimates the deadweight loss, or the extent of the giver’s misestimate, at between 10-33% of the price of the gift. If the rate of gift card disuse is much less than that – and if the cards are used for items that the recipient wants without much additional deadweight loss, then gift cards are pretty good, and the warning from Consumer Reports misses much of their value. Indeed, as a matter of efficiency, we should probably prefer unused gift cards to sweaters that sit in the drawer, because the former is a “mere” wealth transfer, while the latter require energy and other resources to manufacture and distribute. To be sure, if we encourage bridal registries and Christmas wish lists, then we might improve the efficiency of traditional gift giving. But again, these methods do not allow for the fact that a giver might expand a recipient's horizons with a gift; nor do they advance the utility that comes from a pleasant surprise. Waldfogel's analysis and surveys leave the reader with an unfair comparison because many recipients would spend cash in ways they regretted later on. I may value the sweater Aunt Sally gave me at $75, though she spent $100 to acquire it (and the returns process would cost me $26), but had she given me $100 in cash I might have bought a video game that I would report as worth $65 to me in three weeks if Waldfogel would only ask me then what I thought of my homemade purchases.

I would like to see gift cards that increased in value over time. The vendor might be encouraged to reason that it can afford to share (or even exceed) the time value of money because as time ticks by the probability of loss or disuse will also increase. The recipient meanwhile may gain utility because the longer the option period, the more likely the buyer will use the card for something the buyer really wants. The card might also teach something about savings. Unfortunately, it might also teach something about income tax evasion, because in theory a card purchased for $100 that was worth $110 in a year would burden the recipient with $10 of income to report.

Once we see gift cards in this light, we see not only new gifts to give but also new policies for governments and employers. I can set aside $100 now that my intended recipient can cash in for $200 some years from now but use only for education, books, or vacation. The longer the option period, the smaller the deadweight loss is likely to be (and non-use is more of a reverse wealth transfer than an efficiency loss). The benefactor is encouraging a preference, perhaps, but the gift encourages savings, or at least one version of savings.

It was once common to give U.S. Savings bonds as gifts, especially to children, and these matured many years in the future. With that gift, the giver helped to pay for the beneficiary's adult life or education. Such a gift made one feel wealthier, but no one I know jumped for joy when receiving such deferred happiness. It is not just that the gift seemed paternalistic or less utility-enhancing than the cash alternative, because that is true of most non-cash, unrequested gifts. Most gifts, like most government transfers, generate excitement when consumption can be immediate. The recipient shrieks with delight when unwrapping the new bicycle (even though it is a durable good with some pleasure deferred), but is unlikely to do so when unwrapping a promise of a bike to be given in two years.

One lesson to be derived from this is that the way we give gifts is not so different from the way governments bestow benefits to interest groups as well as to beneficiaries of presumed altruism.  We give food stamps (present gift) but we also give public housing (durable good, so there is some deferral) with a presumption that the recipient has the right to remain in the unit. We might often encourage behavior best by giving a completely deferred benefit (that is larger because of deferral), but that is rarely the path law or legislation takes.

If Consumer Reports means to encourage gift cards that do not expire and that do not come with hidden fees, then it is hard to argue with that message. But if they mean to say that conventional gifts are superior, or that cash gifts are to be preferred, then the matter is much more complicated. Gift cards are a compromise between the two (perfectly defensible form of gifts), and the inefficiencies or transfers they generate are not so different from those produced by these other forms of gifts. I hope that when interest-bearing gift cards appear, critics will refrain from complaining too much - without comparing the new gift form to its alternatives.

Comparative Textualism: Land Sabbatical Battles in Israel and American Constitutional Compromises

Few readers of this Blog will have paid much attention to the Israeli Supreme Court’s recent decision disallowing that country’s chief (centralized) rabbinate’s decision to permit local variation in rabbinic councils’ certification of kosher foods, as some of these local councils preferred to be more textualist (and strict) in their understanding of how to abide by the biblical requirement that the holy land be fallow every seventh year (the sabbatical, or “shmita” year). Impermissibly harvested crops would then bring about a refusal to certify foods as kosher. That decision itself seems mysterious to those of us who are accustomed not only to more of a church-state separation, but also to the idea that certification standards should normally proliferate because consumers and producers can then decide on their own courses of action.

An interesting aspect of this far-away dispute is that it demonstrates the unreliability of precedent when there is a confounding text in the background. The law there begins with the biblical text calling for the earth to have a sabbatical year. In that year farming is forbidden and perennial crops are ownerless, with an explicit redistributive nod to poor people who will benefit from the freely available food. But how will the agricultural sector survive this extreme form of crop rotation? One possibility would have been for the lawmakers to interpret the text as requiring each parcel of land to enjoy some sabbatical year, but to permit rotation across the country. Instead, the entire land, within later-defined boundaries, is said to observe the same sabbatical cycle. Modern alternatives or loopholes permit hydroponics, growing crops in trays on tables (not on the “Land”), or transacting with non-Jews. But the most dramatic solution was to permit a form-over-function sale of the land, with the seller working the land as an employee of sorts, with the right or even obligation to buy the land back at the end of the year. This is not a sale-and-leaseback any legal system would accept for tax or criminal law purposes, but it became the dominant means of coping with the text.

One useful and comparativist way to think about this is that a structural argument about the text was allowed to trump a piece of text itself. The structural argument is that the text anticipates an agricultural sector and, for the state to thrive, some solution to the sabbatical prohibition was required. For a long time, only a tiny percentage of lawmakers and consumers found this permissive solution offensive. But affluence makes stricter religiosity possible. Consumers can import produce, and expect contributions or subsidies to prop up farmers who work the land but six of seven years. Sure enough, there is now a substantial movement to reverse the (religious law) precedent and to insist that the sale-and-leaseback accomplishes nothing. Restaurants and other intermediaries are caught in the middle. Law has become a cause of instability. It is possible that the solution was misguided. A more stable equilibrium might have come about through a decision to declare produce farmed in the sabbatical year as ownerless for a brief period of time and then “reclaimed” before sale to the public. Or perhaps the solution should have been to permit export of the otherwise forbidden produce, so that the cost of the text’s prohibition would be limited to the transactions costs of importing and exporting.

In our own legal system we are also accustomed to solutions of uncertain stability that are at odds with, or unanticipated by, our most important text. Roe v Wade’s trimester is one good example, and its stability became an open question after years of apparent precedential force. Dormant Commerce Clause cases may offer another. Various decisions with respect to affirmative action and Equal Opportunity provide other examples. In all these cases, my sense is that once there is serious questioning and “exposure” of the arbitrariness of the first anti-textual solution, we should expect a new (clever or arbitrary) solution, rather than stability based on the text itself or based on broad agreement to abide by the precedent that came to be accepted but then somehow became vulnerable to textual and other objections. Israel’s agricultural sector is too important to be cut down by fierce, minority religious opposition, but the lawmakers will probably need to come up with something new to take the place of, or improve upon, the sale-and-leaseback arrangement. Similarly, the prediction here (to be developed, I hope, in my future work) is that we should expect new means of compromise in the abortion and affirmative action debates. And then these solutions will also have significant but limited lives, for that is the nature of democracy, intense preferences, and the need to pay homage to a founding text.

The Mortgage Crisis and Affirmative Action

Quick: What do current and past mortgage crises have in common with affirmative action?

There is a good deal of irony in the current financial crisis, if it is that. Home mortgage foreclosures have increased and some major lenders are in financial difficulty. The reverberations that have hit the world's stock markets are headline material. Predictably, some politicians favor bailouts in the form of subsidies to homeowners in difficulty. And just as predictably, the reaction of (these and other) politicians is that the lenders are at fault, and that regulation is needed because these lenders were careless in lending to borrowers who could not really make payments. It is even possible that solvent lenders will be penalized for making too many loans of certain kinds. Memories are short. In most atmospheres, politicians are quick to complain that lenders are insufficiently generous when it comes to qualifying borrowers. When real estate prices are rising, it is likely that the complaint will be that more working people should have owned property. When real estate prices fall, the complaint will be that lenders profited by exploiting over-optimistic borrowers.

(Virginia's Driver Responsibility) Fines and Taxes

Recent news has focused attention on a Virginia law, effective July 1, that dramatically raises fines for reckless driving, including a speeding violation at more than 15 miles per hour above the speed limit. The legislative history and statutory language makes clear that the fines are a revenue-raising measure, and they therefore raise the interesting question of whether we need to separate taxes from penaltiies, or even deterrence. (I will ignore here the interesting point that the legislation was introduced by a legislator whose law firm specializes in traffic law and will therefore see much more business in defending drivers who have more reason to dispute citations.) As if to confirm the revenue-raising goal, the fines are earmarked for transportation projects, and are to be applied only to Virginia residents on Virginia roads. At least four other states have "driver responsibility laws" that apply to out-of-staters as well as residents. I don't think this last provision was necessary for constitutionality, but let us just accept the resident/nonresident distinction as aiming to avoid claims of discriminatory enforcement against out of state residents. I return to the limitation to Virginia residents below.

Sicko and Health Care Reform

The new Michael Moore movie is provocative. It reminds me of Al Gore's "An Inconvenient Truth" and then also Morgan Spurlock's "Super Size Me." These are manipulative movies with single-minded aims and characters. They can be very annoying to watch, especially as the enthusiastic audience, in attendance at the sneak preview of Sicko that I patronized, cheers for the sorry citizens who have bad results under our current health care system and gasps in horror at the evil insurers. The policy argument could be much, much better. Moore makes very little of the enormous cost of our system. He loves showing the audience that there is no billing department in the French and Canadian hospitals he visits, but does not bother to point out that a substantial fraction of our costs goes to administration, including billing. The insurance carriers are made out to be evil when they deny coverage, but it would have been much more interesting to try and see whether the "experimental" treatments denied would indeed have been undertaken in France or Canada. Part of the movie makes us out to be ungenerous, but then then the better part begins to get at the fact that we have poor overall performace for the resources we do spend. The funniest and most provocative part of the movie comes toward the end, when Moore takes some of the sad cases from the U.S. and seeks help in Cuba. For an annoying, anti-intellectual, biased, and manipulative documentary, it is finally entertaining and provocative. It is hardly the best thing that could have been done in favor of universal health care but, like the Al Gore movie, it just might make more Americans care about the subject, and begin to ask the right questions.

Résumé lies and signals

Today's news includes that of the resignation of MIT's much admired Admissions Dean, Marilee Jones, who admitted fabricating her own educational credentials. Here was a person with no undergraduate degree, who feigned one or more undergraduate and graduate degrees in order to get a low-level professional position decades ago and, then, kept up the false front with a few other misstatements, as she rose to the top of the admissions world. The tale is especially ironic or sad because the wrongdoer's own career success has included a book (and many talks) that emphasizes the importance of personal integrity.

Posner, Barak, and Judicial Activism

Richard Posner's recent review of Aharon Barak's "The Judge in a Democracy" in The New Republic is good reading and focuses attention not only on a favorite of constitutional activists but also of many Israelis who are proud of their creative, intelligent, and extremely aggressive (recently retired) Chief Justice. Barak's activism is often glorified in American Law Schools; he often found "unreasonable" government actions illegal, and occasionally compelled government action where democratically elected officials had chosen not to act or to act differently, and thus appealed to the optimistic and wildly self-confident views of American academics. Posner, unsurprisingly and refreshingly, is much less smitten than many of the constitutional law scholars I have observed.

Primary Reform

As the Presidential races gather steam, there is the familiar topic of the timing and location of the primaries. Early primaries gather "too much" attention, though there was once some charm, or even value, to testing the candidates in American living rooms in New Hampshire and Iowa. Super Tuesday sought to increase the importance of Southern states. And California is always in the news because it is not sure where it wants to be on the election calendar. One idea has been to create a national primary, another is surely to rotate a set of primaries, regional or otherwise. But of course a problem with deemphasizing any one state is that the cost of entry increases for candidates, and the pressure of campaign finance is already great.

Privatizing the Lottery - and other Things

Assume state run lotteries. (We do have them after all, so it is not as if we need always start from first principles. If there were a good reason to prefer the privatization of Illinois's or another state's lottery, then of course we should proceed even if the first-best world had been one with no state-sponsored lottery. Besides, there are some good arguments for a lottery, and indeed for one that does not have a thin profit margin. Even a good libertarian could say that inasmuch as the government is not coercing persons to play the lottery, and there are many private alternatives for gamblers, a state lottery is not the worst of all evils. Some people might actually like playing it, and that must count for something, just as some small investors seem to like paying for stock market advice.)

Title IX and Women Practicing with Men

Last week's NY Times had an article centered around a practice known to most observers of women's sports, that some women's teams practice against or with men, often ex-high school athletes who could not quite make the college men's team. But apparently some college conferences, and eventually the NCAA, may bar women's teams from this practice of using men either because it is regarded as somehow demeaning for women or, more concretely perhaps, because of the likelihood that college women's teams would then need fewer women. Indeed, some schools are not using the full complement of scholarships, and some have teams with rosters smaller than those allowed by the governing rules of the sport. But is there really a Title IX or other problem?