The economics of favors

This paper examines the favors people perform for each other using a stochastic version of the infinitely-Repeated Prisoner's Dilemma (RPD). It is shown that the socially efficient outcome may not be consistent with an equilibrium because some favors are too expensive to perform. On the other hand, it is possible for some socially inefficient favors to be performed. Even so, favor-exchange relationships must be strictly Pareto-improving. The model is also able to address situations in which there are market alternatives to the services being exchanged, and when favors are exchanged among members of large groups or hierarchies. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: D23; D64.