The Deadweight Loss of Gift Vouchers

Of the $92 billion spent on gift vouchers in the U.S. last year, $6 billion was lost to fees and unused cards. In response to this, the U.S. Credit Card Act now bans fees on vouchers that have been dormant for less than 12 months and expiration dates of less than five years from the date of purchase.

The problem is, according to research on how we use vouchers, this is the opposite of what’s needed to prevent an increase in the deadweight loss of gift vouchers.

Ryan Sager explains:

While these are intended as pro-consumer reforms, they’re based on a misunderstanding of the real problem with gift cards: You lose money on them not primarily because of fees or expiration dates, but because you throw them in a drawer and forget about them. Or, you lose them, or you hold on to them indefinitely — always thinking you’ll redeem them tomorrow.

It’s counterintuitive, but the way to make people more likely to redeem their gift cards would be to shorten the time before they expired.

Sager points to two studies that corroborate this assumption: one indirectly, showing that city residents are less likely to see ‘the sights’ of that city than tourists with limited time; and another directly, conducted on students with obviously twisted priorities:

64 undergraduates [were given] coupons for a slice of cake and a beverage at a local French pastry shop. Half got a certificate that expired in three weeks, half got one that expired in two months. While students were sure they were more likely to use the certificate with the more generous timeframe, the results were clear: The shorter timeframe made the students much more likely to redeem their certificates; 10 of the 32 students (31%) redeemed the three-week certificates, only two of the 32 students (6%) redeemed the two-month certificates.

Long-time readers may recall Joel Waldfogel’s research on the inefficiencies of Christmas gift-giving: a deadweight loss of 10%, resulting in a $4 billion loss to the US economy every year.

In that article, Tim Harford suggested small and sentimental gifts as ideal, warning against gift vouchers as “they have no sentimental value but still create deadweight loss, since many expire without being used, or are sold at a loss”.

You have been warned.