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.