Law School Dean Recommends Gift Cards

Consumer Law

Posted Nov 13, 2007, 06:33 pm CST
By Martha Neil

A recent issue of Consumer Reports magazine advises shoppers to be wary this holiday season of buying gift cards that may involve hidden fees or may never be used.

But in fact it appears that the so-called "deadweight loss" associated with gift cards may be lower than for many other gifts, making them a better value than the magazine indicates, writes Saul Levmore, dean of the University of Chicago Law School, in a Faculty Blog post.

Depending on how well the giver knows the recipient, he or she may not make an optimum choice when purchasing a "real" gift, such as a holiday sweater, that could just wind up sitting in a drawer, Levmore points out. And as academic Joel Waldfogel says in what Levmore describes as his "well-known work on the deadweight loss associated with Christmas," the "extent of the giver's misestimate" of what the receiver actually would want can be considerable. It is between 10 and 33 percent of the price of the gift, as far as acquaintances are concerned, according to Waldfogel.

Other issues arise, too, when one starts considering the gift card issue from a more sophisticated economic perspective, according to Levmore, who goes on to discuss the time value of money, transaction costs, potential tax evasion and the similarity of gifts and government transfers in his eight-paragraph post.

Bottom line: "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," he writes. "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."

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