Fishy Gifts: Bribing with Shame and Guilt

Gifts are often used where the institutions of contracting do not exist, or are underdeveloped, as in emerging markets, or otherwise unenforceable, as with illicit transactions in developed markets. The following is an analysis of gifts in the context of belief preferences with unobservable reciprocation. I show that if recipients are heterogeneously shame and guilt averse, the beliefs implied by a gift can induce a self-fulfilling reputation through their interaction. In particular, I show how a bribing firm, by varying the saliency of the bribe through cheap talk announcements or by varying the value of the gift, can induce free-riders (non-reciprocators) to reject and thus, reduce costs. In cases when the shame of accepting a possible bribe is too great, I show lowering the cost can invite free-riders to accept, and thus, reduce the shame of those who would reciprocate into accepting. The model was inspired by the gift giving practices of pharmaceutical firms to US doctors. I explain a perverse consequence of current policies to prevent reciprocation, and why the most obvious solution, a ban on gifts, has been adopted only by a handful of hospitals. I discuss implications for professional services where reciprocation is a credence good. To my knowledge, this is the first study of how the shame of accepting a gift may interact with the guilt of not reciprocating to select for reciprocation