Santa Claus is the character that symbolizes Christmas gift giving. That is his job. Once a year, the guy in the red suit gives gifts to every child that has been tagged as nice. In other words, why do we give gifts during Christmas?

While macroeconomics has something to say about Christmas (read my article last week), microeconomics is far more critical of the season such that one can argue Ebenezer Scrooge was an economist. 

Ever read the Christmas short story of O’Henry, the “Gift of the Magi?” Spouses Jim and Delia sacrifice their most valued possessions — a gold watch and her long hair — to buy a pocket watch chain and a comb, respectively, which resulted in nullifying the intended benefits. 

In most schools and offices, there is the tradition of exchanging gifts known as Kris Kringle or the more religion-neutral term, mommy (or daddy)–baby.

As overthinkers, economists just had to ask, “is this gift exchange efficient?” or in other words, is the value of the gifts fully reflected? Studies such as Waldfogel in 1993 investigated the deadweight loss of Christmas. Giving or exchanging gifts can be considered irrational.

Givers of gifts want to make the receivers happy but there is the problem of what gift will do the job. If you know the preference of the receiver of the gift, you will likely give a non-cash gift. If you are not sure, cash would be the preferred gift. 

The problem of the gift exchange or market is deciding on what to give the other person and the expectation of the gift to be received. This is the reason it would be safe to ask the other person what they would want to receive for Christmas. 

This would indicate an efficient exchange of gifts. Of course, it also means that there are no surprises. Unexpected gains can be considered awesome while unexpected losses can be questioned with “WTH” is this?

Children experience this Christmas magic the most because what a gift should do is enable the receiver to obtain the unobtainable. With their lack of financial independence, each gift received is a desired object that comes from another dimension. 

As we grow older and attain financial independence, more of these objects become financially obtainable. Budget constraints, however, can limit choices. In other words, while I can afford to buy, I choose not to because there are other needs or wants that have a higher priority. Gifts that enable the receiver to lift these budget constraints temporarily enhance the yield to the receiver. It would seem more magical.

The Magi are probably the original source of this tradition of gift giving. Because their gifts were meant to honor the infant Jesus, most people would disagree with treating gift giving or exchange as something that should be efficient. 

We give gifts out of the goodness of our hearts, and it is the thought that counts. 

The same question was asked by John L. Solow, the son of Nobel Laureate Robert M. Solow, in 1993. While he agrees that not exchanging gifts would seem rational, it would be wrong to conclude that those who do exchange gifts are acting irrationally.

Santa Claus has a job because there is a need, at least once a year, for everybody to try to make another person happy or happier. In economic terms, maximize utility because truth be told, markets are not always in equilibrium. 

If people did not exchange gifts and acted rationally the whole year round, then life would be filled with unfilled gaps all the time. While not all gifts will achieve their intended effect, if the giver puts the receiver’s welfare in mind, then for at least one day of the year, we experience awesome.