How Consumers use Gift Certificates

This discussion paper resulted in the article Broad and Narrow Bracketing in Gift Certificate Spending in the 'European Economic Review' (2014). Volume 66, pages 284-302. We survey 1,050 consumers who have just redeemed one or more open loop gift certi cates to learn whether they view gift certi cate income, cash gifts and non-gift income as substitutes. We find that the majority (83%) of recipients spends the certi cates in the same way as cash. The other respondents (17%) bought an item they would not have bought otherwise but adjustments in their shopping pattern do not seem to result from constraints in redeeming the certificates: 80% of all respondents in this group says they have used the certi ficate to buy an item they really love to have. While inconsistent with standard microeconomic demand theory, this behavior can be explained by narrow racketing: In spending gift certifi cates, these consumers consider a limited choice set of nice, personal items. Our data show that females are more likely to narrow bracket gift certificate income and that positive reciprocity towards the giver induces narrow bracketing in case the giver is a household member who suggests to buy a particular item using the ceriti cate. Previous studies have found that both giving in-kind gifts (Waldfogel, 1993) as giving gift cards (O enberg, 2007) entail a welfare loss of 10-30 percent when compared to giving cash. We find that the welfare eff ects of open loop gift certi cates among users are limited: The consumption of broad bracketing consumers is una ffected and narrow bracketing consumers seem to value the possibility to separate gift certi ficate income from other income sources.