Sunday, January 15, 2012

What is the price of Free?

One of the few things that seem to unite economists of almost every stripe is their criticism of the culture of gifting every holiday season. The argument is fairly simple – buying a gift for a person is making an assumption that the recipient would extract the same value from the gift that had the giver had expected. And we all know how flawed that assumption is – just look at all the gifts that made you go ‘What on earth was she thinking when she gave me this – what use will I find for this?’ before you tossed the gift aside and never ever looked at it again. Every one of those cases was a pure waste in terms of economic value terms: money was spent but no utility derived. Except of course, the utility for the giver derived from the satisfaction of giving – which, unfortunately, economics does not recognize.

Giving stuff away for free has the same issue – the giver incurs a cost in the transaction, but if the recipient does not see at least that value, there is a net economic loss incurred. Which is why economists have long argued against subsidies – if you want to give, the most optimal thing to do is to give cash or semi-liquid options like food coupons which offer the flexibility to the recipient. This argument works well when the relationship is largely transactional, like it is between the government and the citizens.
But how about a relationship between the employer and the employee where there are other motives like employee motivation are involved? For instance, Google famously offers gourmet, free food to all its employees at a considerable cost. In pure economic terms, that is clearly not the most optimal allocation of resources – but then why do they do it? Conventional wisdom says that signals like these have a positive impact on employee loyalty. Not sure if there is any data to back this up - however, that has not stopped companies from routinely indulging their employees with free food, free massages et al. At least Google has managed to leverage this to create an employee-centric image. And maybe the moral here is this: if a company does want to give anything away for free, make the transaction so unique and special that employees will find it hard to put an economic value to the transaction. While that does not take away the problem of economic waste, it does make it worthwhile.

Does your company pamper you with freebies and if yes – would you be better off if it gave you the equivalent amount in cash and let you make the decision on how to use it? Would that reduce your relationship with your employer to merely transactional or would you respect your employer more for having trusted you to make the best use of the cash and thereby, ensuring that there is no economic waste generated out of this transaction? 

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