Journal of Economic Behavior & Organization Vol. 39 (1999) 399–420 Gift giving with emotions Bradley J. Ruffle ∗ Department of Economics, P.O. Box 653, Ben-Gurion University, Beer Sheva 84105, Israel Received 4 May 1998; received in revised form 13 January 1999; accepted 19 January 1999 Abstract This paper presents a two-player, psychological game-theoretic model of gift giving where emo- tions matter. Beliefs enter directly into players’ payoff functions. Surprise, disappointment, embar- rassment and pride arise from comparing players’ beliefs about the gift they will give or receive to the actual choice of gift. Depending on beliefs and the cost of the gift, a gift-giving, a non- gift-giving, or only a mixed-strategy equilibrium may exist. Even after allowing for a definition of welfare which incorporates emotions and fairness, all equilibria of the model make the giver worse off. Implications of the model for holiday gift giving, tipping and labor relations are explored. ©1999 Elsevier Science B.V. All rights reserved. JEL classification: A12; C70; D63. Keywords: Gift giving; Psychological equilibrium; Reciprocity; Welfare; Labor relations 1. Introduction “Things have values which are emotional as well as material.” (Mauss, 1969, p. 63) Gift giving is an ancient custom which has interested anthropologists, philosophers, sociologists, psychologists and, more recently, economists. Historically, gifts performed primarily economic functions. For example, Posner (1980, pp. 16–17) discusses the role of gifts as insurance against hunger, given out of one group’s surplus with the implied obligation of repayment at some future date. The reciprocal nature of gifts implied the notions of loan and credit between two groups (Mauss, pp. 34–35). Gifts were also used to signal wealth, character and seriousness of intent between two groups attempting to establish trading relations (Mauss, pp. 34–35, Posner, pp. 24–25). ∗ E-mail: bradley@bgumail.bgu.ac.il 0167-2681/99/$ – see front matter ©1999 Elsevier Science B.V. All rights reserved. PII:S0167-2681(99)00048-7