Cash for Christmas
Schitt’s Creek: S4, E13 “Merry Christmas, Johnny Rose”
Consumer Behavior: In-Kind Transfers
Johnny is trying to get his family excited for Christmas in Schitt’s Creek. In a flashback to the Rose family’s heyday, an extravagant Christmas party ends with Johnny searching for his children, only to find them recently departed.
Johnny: “I thought we could open presents tonight.”
Moira: “Oh, don’t worry. I already gave them their checks.”
Cash for Christmas? Moira must have taken an economics class or two. Standard economic models say that cash, perhaps in the form of a large check, is the most efficient gift.
To see why, let’s build a model of consumption choices in the Rose family’s prosperous past. Start with Alexis, whose choices we will analyze with the following assumptions:
- She consumes two goods: exotic vacations and dresses.1
- Alexis appreciates both vacations and dresses. But her joy from an additional vacation or an additional dress decreases as she consumes more of each.
- She has an income of $20,000 and spends it all.2
- Vacations are priced at $2,000 each and dresses at $400 each. Alexis consumes so little of each relative to the entire population that her choices have no effect on these prices.
This model then predicts what combination of dresses and vacations Alexis will consume. She maximizes her utility, her joy from her consumption, by choosing the combo on the highest indifference curve that’s still within her budget. Suppose she does this by going on 6 vacations and buying 20 dresses.3
Here’s where Moira’s generous gift comes in: $2,000 in cash. Now Alexis could buy up to 60 dresses instead of a maximum of 50 or up to 12 vacations instead of a maximum of 10. Her budget goes $2,000 further.
Johnny is a more traditional gift giver though. Perhaps his idea was to gift Alexis two vacations: one to Capri and one to Tokyo. While Moira gives cash, Johnny’s gift would be an in-kind transfer. A gift of two vacations pushes her budget further in the direction of vacations, just like the cash gift. But dresses are still capped at 50.
The differences between the two gift types is shown in the figure below, along with Alexis’s utility-maximizing consumption with no gift, a cash gift, and a gift of two vacations.
As measured by her utility, it makes no difference to Alexis whether she gets a cash gift or two vacations.
- Cash gift: 7 vacations, 25 dresses
- Two vacations gifted: 7 vacations, 25 dresses … the same result!
- No gift: 6 vacations, 20 dresses
If she’s gifted two vacations, why would her number of trips only increase by one? Imagine you typically drink a gallon of milk each week. But then your neighbor gifts you an unopened gallon. They’re going on vacation. You’re unlikely to double your milk drinking that week as a result. Instead, you’ll buy less milk and spend the savings elsewhere.
But the take-home point is that the heartfelt vacations gift does no better than cash. Alexis ends up with the same consumed combination and same utility either way. The same would be true with 10 gifted dresses instead, so hopefully Johnny didn’t spend much time debating what to get her.
That brings us to David, who also receives a Christmas check. Assume the following about David’s consumption:
- He consumes two goods: black sweaters and colorful sweaters.
- David has an affinity for black sweaters. Sure, colorful sweaters may be good for warmth, but it’s just not his style. Extra black sweaters generate more utility much faster than colorful sweaters do.
- He also has an income of $20,000 and spends it all.
- Both types of sweaters, at least for the brands David would wear, are priced at $400 each. And even though David is a fiend for sweaters, his consumption level has no effect on these prices.
Moira doesn’t play favorites, at least this time, so David is also gifted $2,000. But Johnny had in mind five colorful sweaters (at a $2,000 expense). David’s budgets under each scenario and his eventual sweater consumption as a result of these varying gifts are shown below.
Now, David’s consumption depends closely on what kind of gift he’s given.
- Cash gift: 3 colorful sweaters, 52 black sweaters
- Five colorful sweaters gifted: 5 colorful sweaters, 50 black sweaters
- No gift: 2 colorful sweaters, 48 black sweaters
Crucially, David’s utility is highest with the cash gift. Cash brings him to a higher indifference curve than the other options. When gifted five colorful sweaters, his budget doesn’t expand in the direction of more black sweaters to the full extent possible. Cash would have been better. Bah humbug!4
Of course, anyone familiar with David knows he likes to wear black and white. No bright colors. But gift givers are often searching for items the recipient doesn’t have yet. A colorful sweater seems to be exactly that. Surely you have received a “colorful sweater” as a gift before too. Cash would have gone further. Moira is onto something.
But if Johnny had some economics expertise, he might point out that other economic models might apply here as well. He might say that actual gifts, rather than cash, are effective signals that the gift giver cares about the receiver and spent time thinking about them. This helps strengthen relationships in a world where people don’t often have much time for each other.5 And imagine a gift exchange where each person passed a $20 bill to the person on their right. Nothing has been accomplished there.
But both models agree that if you’re going to get someone a gift, do your best to get something they like. And doesn’t everyone like cash?
Johnny: “The church had a small rummage sale this morning, so I popped in. Close your eyes, Moira.”
Moira: “A bomb?”
Johnny: “No, it’s an antique tin.”
Moira: “Oh.”
1 Nobody consumes just two things. But this assumption makes graphical analysis possible. The model can be extended to n goods and its conclusions wouldn’t change. One would just get to do a lot more math.
2 For most consumers, the “spend it all” assumption is a bigger leap than it is for Alexis. But one could also model the situation as a consumer having an assigned budget for a pair of goods that they exhaust.
3 More formally, one would define a mathematical utility function that translates combinations of vacations and dresses into a numerical value. She then chooses the combination where the ratio of marginal utilities equals the ratio of prices, subject to her budget.
4 What if he’s gifted five black sweaters instead? Then he would end up in the same place as with a cash gift, just like the example with Alexis.
5 A key feature of signaling models is that the sender of the signal, the gift giver in this example, incurs sufficiently high costs. It’s also worth noting that in a signaling model of gift giving, givers benefit from the signal sent while non gift givers look worse for not having provided a gift.
More from Schittʼs Creek:
1 Nobody consumes just two things. But this assumption makes graphical analysis possible. The model can be extended to n goods and its conclusions wouldn’t change. One would just get to do a lot more math.
2 For most consumers, the “spend it all” assumption is a bigger leap than it is for Alexis. But one could also model the situation as a consumer having an assigned budget for a pair of goods that they exhaust.
3 More formally, one would define a mathematical utility function that translates combinations of vacations and dresses into a numerical value. She then chooses the combination where the ratio of marginal utilities equals the ratio of prices, subject to her budget.
4 What if he’s gifted five black sweaters instead? Then he would end up in the same place as with a cash gift, just like the example with Alexis.
5 A key feature of signaling models is that the sender of the signal, the gift giver in this example, incurs sufficiently high costs. It’s also worth noting that in a signaling model of gift giving, givers benefit from the signal sent while non gift givers look worse for not having provided a gift.