The cool thing about this gift certificate is that I can use it to buy anything I want, since they’ll redeem it just about anywhere. And I don’t have to worry about finding items that add up to just the right amount, because they’ll always give me change.
But seriously: Gift certificates have been around as long as I can remember, but only in the last few years have I noted the arrival of the broad-use gift certificates. You can, for instance, buy a Westfield gift certificate, which can be used at any store in any mall in the Westfield chain. Or you can buy an American Express gift certificate, which can used at any location that accepts American Express cards. The question is, what advantage do these gift certificates have over all of the following: regular gifts, single-retailer gift certificates, and cash?
The simplest – that is, most simplistic - economic analysis says that you should always give cash. Why? Because the recipient knows what she wants or needs better than you do. The worst case scenario is that she’ll use the money to buy whatever you would have bought her, in which case she’s at least no worse off. And otherwise, she buys something she wants more, in which case she’s better off. So if you’re hoping to maximize the recipient’s utility, cash is your best option.
When I teach this lesson to my microeconomics classes, I title it “Why my uncle the economist always gives me money for my birthday.” But as my nephews (and all my other friends and relatives) could tell you, I give them actual presents, not cash. What purpose is served by giving presents instead? Others have tried to answer this question, but here’s a quick summary of leading reasons:
1. To signal to the recipient that you care enough to spend time searching for a gift she’ll like.But if these reasons are good ones, then why give gift certificates? With respect to signaling, the gift certificate says, “I made a little more effort than just visiting the ATM, but not much more,” or “I know you well enough to find out where you shop, but not well enough to know what you’d buy there.” With respect to time saving, the gift certificate is useless because the recipient still has to go out and purchase what she wants. With respect to using superior information, the gift certificate only uses information about location (“I think Jenny might really like Pottery Barn if she would just try shopping there”) but not about specific items. And with respect to accomplishing a goal of your own, the gift certificate may utterly fail unless the chosen retailer has a very narrow selection.
2. To save the recipient the time it would take to purchase the gift. (But this argument depends on your having a sufficiently good idea of what the recipient would want. Also, if your opportunity cost of time is greater than the recipient’s, it would make sense to give cash and increase the amount to compensate for travel time.)
3. To make use of superior information – e.g., you might know, or strongly suspect, that the recipient would really enjoy Book X, which you’ve read and she hasn’t. If you gave cash, she might never try that specific book.
4. To accomplish some goal of your own – e.g., giving an electric razor to your husband who doesn’t shave often enough, or giving an educational toy to a child you think should study more often.
I figure that gift certificates are intended primarily to send positive but weak signals to recipients. The implicit message is: “I thought of you, and I even spent a little time for your benefit, but I don’t pretend to know you very well.” But from the recipient’s perspective the gift certificate can be a hassle, even if its message is well intentioned. The loss in buying flexibility may swamp the gain in warm fuzziness. Hence the emergence of the broad-use gift certificate. This sort of gift certificate sends a slightly attenuated signal – something like, “I thought you merited a small bit of my valuable time” – in exchange for a relatively large, though not unlimited, increase in buying flexibility.