Gift giving with emotions

This paper presents a two-player, psychological game-theoretic model of gift giving where emotions matter. Beliefs enter directly into players' payoff functions. Surprise, disappointment, embarrassment 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.