Dollars vs. Sense
Gee, Thanks Grandma
Remember when you were a kid opening presents on Christmas morning? Remember that feeling of dissapointment when you opened a gift from a relative who didn’t know you very well and it was something you didn’t want? That Grinchian distress in your heart was a manifestation of what economists have deemed Deadweight Loss. Effectively, it’s a destruction of value that occurs when someone (for example) spends $100 on a gift that you value at only $10 (especially if you can only resell it at that lower price). $90 of wealth is obliterated in that transaction! For more on deadweight loss and gift giving, see this paper.
This wanton destruction of wealth be alleviated by either putting a lot of time and effort into choosing just the right gift, Sometimes you can even create wealth, by giving someone a gift they value more than what you paid for it! or by taking the easy path and just giving cash.
There is a problem with cash as a universal gift – social norms are tricksy and don’t respond well to economic theories, no matter how well reasoned they may be. You can wrap your cash in as many economics papers about deadweight loss as you want, you’re still going to be complaints when you give it to your spouse. Gift exchanging can feel pointless if everyone is just sitting in a circle and passing Benjamins to their left.
But clearly this isn’t always the case – kids love getting cash from their parents, and most people would much prefer their boss give them a cash bonus over any other option.
So what gives? Why is cash okay in some situations, but not others? What arcane rules govern these festive rituls?
It’s All About Hierarchies
The answer is simple: cash is an acceptable – even preferred! – gift when given from a higher status to a lower status. This is why you’re happy to accept $100 from your grandparents, parents, or boss, but not your spouse, friends, or neighbors.
We have inherently different standards for gifts recieved from peers than from those of a different status. If a peer gives a gift, there’s an expectation that it be thoughtful and representative of the strength and depth of the relationship. Deadweight loss isn’t as important as the message the gift sends and cash signals a cold and distant relationship.
This is not true when you receive a gift from someone who is not a peer. In these circumstances we’re very conscious of the deadweight loss, whether we know it or not. Our elders and superiors are not expected to know us deeply and profoundly, so we much prefer it when they just give us the money to buy what we want ourselves. This expectation of understanding also explains why kids want presents from their parents when they’re young, and transition to preferring cash as they get older.
So lean into cash in all the situations it’s appropriate and know that not only will your gift be more appreciated, you’ll be doing your small part to save the economy as well.