Guilt Driven Reciprocity in a Psychological Signaling Game

We propose a theory of reciprocity according to which reciprocal behavior is driven by a donor's guilt. Through an experiment we show that subjects respond to factors which induce guilt but do not reflect allocative equity or intention. When the guilt inducing factor is privately observed by the donor, a psychological signaling game results. We solve for the separating and pooling equilibria. In a separating equilibrium, the donor distorts her gift to signal a low level of the guilt inducing factor. Consequently, conditional on the realization of a low level of guilt inducing factor, the donor gives a smaller gift when the guilt inducing factor is privately observed than when it is commonly known. Our experiment confirms this implication of the separating equilibrium.