Present and correct

1st December, 2007

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 voucher that has taken the US by storm over the past decade, and is also becoming popular over here. The popularity is odd: this is a gift that combines all the charm of a hideous cardigan, with the can’t-lose flexibility of a rumpled tenner slipped in a Christmas card.

Dismiss my complaints, if you will, as unwarranted generalisations 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 DC, a lunch guest once bought a gift basket for us that included a $50 gift card for a chain store named Bed, Bath & Beyond. It was awkwardly generous – especially to Bed, Bath & Beyond. My wife and I never did find the shop and spend the cash. And when we gave Borders gift cards to a niece and nephew in the Lake District, we later discovered that the nearest Borders was in Manchester, an hour and a half’s drive away.

This is typical enough. Last year, the research outfit TowerGroup estimated that 10 per cent of spending on gift cards in the US was wasted because the cards expired or were lost without being redeemed. And it gets worse: many cards are redeemed only after being sold on at a loss by the original recipient.

Jennifer Pate Offenberg, an economist who wrote a recent survey of the gift-card market, 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 per cent 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, then, why not give them a £20 note and flush the extra fiver 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 jewellery, but cards from Victoria’s Secret and Tiffany bombed on eBay, reselling at roughly a 20 per cent discount.

Better still, why not buy a thoughtfully chosen but modest present? If an inexpensive present 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 cheque into the gift wrapping.

First published at ft.com.

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