UUnniivveerrssiittyy ooff CChhiiccaaggoo LLaaww SScchhooooll CChhiiccaaggoo UUnnbboouunndd Journal Articles Faculty Scholarship 1997 AAllttrruuiissmm,, SSttaattuuss,, aanndd TTrruusstt iinn tthhee LLaaww ooff GGiiffttss aanndd GGrraattuuiittoouuss PPrroommiisseess Eric A. Posner Follow this and additional works at: https://chicagounbound.uchicago.edu/journal_articles Part of the Law Commons RReeccoommmmeennddeedd CCiittaattiioonn Eric Posner, "Altruism, Status, and Trust in the Law of Gifts and Gratuitous Promises," 1997 Wisconsin Law Review 567 (1997). This Article is brought to you for free and open access by the Faculty Scholarship at Chicago Unbound. It has been accepted for inclusion in Journal Articles by an authorized administrator of Chicago Unbound. For more information, please contact [email protected]. ALTRUISM, STATUS, AND TRUST IN THE LAW OF GIFTS AND GRATUITOUS PROMISES ERIC A. POSNER* I. INTRODUCTION The law discriminates between gifts and exchanges in odd and interesting ways. A promisee can sue to enforce an ordinary commercial promise, but not a promise to give a gift. Creditors can force a donee to disgorge gifts received from insolvent debtors, but they cannot usually force a purchaser to disgorge goods purchased from insolvent debtors. In England and the United States, disinherited spouses can sometimes reverse inter vivos gifts that diminish their statutory share of the estate; in civil jurisdictions, disinherited spouses and children can do this routinely. But in none of these places can disinherited relatives reverse commercial exchanges that have diminished the value of the estate. What accounts for these differences? To understand the law's treatment of gifts and gratuitous promises, one must recognize that people have many different motives for giving gifts. This article assumes that people give gifts to each other in order to (1) enhance the well-being of the donee, (2) increase the status of the donor, or (3) enter or enhance an exchange relationship. It concludes that much gift-giving is not as socially valuable as routine commercial exchange, and therefore legal protection of gift-giving is not as justifiable as legal protection of commercial exchange. However, failure to enforce gratuitous transfers is less justified than failure to enforce gratuitous promises because of differing problems of reliance in the two cases. Furthermore, much gift-giving that is socially valuable derives its value from its role in nonlegal relationships, and therefore efforts to regulate it with the law would reduce its value. The argument differs both from the economic literature on gratuitous promises and from the doctrinal literature on gratuitous promises. The law and economics literature, almost exclusively, assumes that altruism * Assistant Professor of Law, University of Pennsylvania. My thanks to Ian Ayres, Lucian Bebehuk, Stephen Coate, Richard Craswell, Jesse Fried, Louis Kaplow, Richard McAdams, Richard Posner, Steven Shavell, Michael Trebiicock, participants at a seminar at Harvard Law School, and participants at the Wisconsin Law Review Symposium, for their helpful comments. HeinOnline -- 1997 Wis. L. Rev. 567 1997 WISCONSIN LAW REVIEW is the sole motive of gift-giving.' The article improves on this literature by considering other motives for gift-giving. In addition, the article criticizes the logic of some of the economic arguments that assume altruism. The doctrinal literature on gratuitous promises generally relies on less narrow assumptions about motivation than does the economic literature.2 The articles in this literature, however, are frequently unsystematic and their conclusions are, as a result, hard to evaluate. This article improves on the doctrinal literature by treating the motives of gift- giving in a more complete and systematic manner. The use of economic ideas, it is claimed, allows a more rigorous argument. At a broader level, I hope to show that some simple economic ideas help us understand complex phenomena usually analyzed by sociologists, not by economists (in the legal literature)3-phenomena like status and trust. The article should be taken as. an illustration of the thesis that "law and economics" rather than "law and sociology" provides a more promising methodology for investigating the law. Part II discusses the meaning of gift-giving, the reciprocation norm, and the motives for gift-giving. It shows that the altruism assumption cannot by itself explain the pattern of gift-giving observed in everyday life, and it justifies the more complex assumptions regarding motivation. Part III discusses the social utility of gift-giving. Part IV examines the legal treatment of gift-giving.4 1. See, e.g., MICHAEL J. TREBILCOCK, THE LIMITS OF FREEDOM OF CONTRACT 170-87 (1993); Charles J. Goetz & Robert E. Scott, Enforcing Promises:A n Examination of the Basis of Contract, 89 YALE L.J. 1261 (1980); Richard A. Posner, Gratuitous Promises in Economics and Law, 6 J. LEOAL STUD. 411 (1977); Steven Shavell, An Economic Analysis of Altruism and Deferred Gifts, 20 J. LEOAL STUD. 401 (1991). 2. See, e.g., Melvin Aron Eisenberg, Donative Promises, 47 U. CHI. L. REV. 1 (1979); E. Allan Farnsworth, Promises to Make Gifts, 43 AM. J. COMP. L. 359 (1995); James Gordley, Enforcing Promises, 83 CAL. L. REV. 547, 570-82 (1995); James D. Gordon 111, Considerationa nd the Commercial-Gift Dichotomy, 44 VAND. L. REV. 283 (1991); Andrew Kull, Reconsidering GratuitousP romises, 21 J. LEOAL STUD. 39 (1992). 3. Economists writing about gift-giving outside of contract law have frequently assumed nonaltruistic motives. For a recent survey, see Susan Rose-Ackerman, Altruism, Nonprofits, and Economic Theory, 34 J. ECON. LITERATURE 701 (1996). 4. For the most part, I ignore some important related issues, including the tax treatment of gifts, see, e.g., Mark P. Gergen, The Case for a Charitable Contributions Deduction, 74 VA. L. REV. 1393 (1988), and the role of'nonprofits, see, e.g., THE ECONOMICS OF NONPROFIT INSTITUTIONS (Susan Rose-Ackerman ed., 1986). HeinOnline -- 1997 Wis. L. Rev. 568 1997 1997:567 Law of Gifts and GratuitousP romises II. WHAT ARE GIFTS? A. Terminology A "gift" is defined as a transfer of goods or services by a "donor" to a "donee," where the donee is not required by agreement or convention to transfer something specific back to the donor in exchange. An anonymous donation to victims of a disaster or a toy for a small child are clearly gifts, because nothing is expected in return. Frequently, however, transfers that are called "gifts" do call for a return transfer, if only implicitly or by convention: a gift to a friend often calls for a return gift on a future occasion, or at least expressions of gratitude; a gift to a business associate frequently creates the expectation of future dealings; and a gift to a politician generally requires the politician to show some favoritism to the donor in return. The observation that almost all gifts are components of an implicit exchange has led some scholars, particularly those writing in the anthropological and sociological traditions, to collapse the categories of gift and exchange, and to claim instead that gift-giving is a form of exchange behavior.5 This impulse also seems to lie behind some famous judicial decisions.6 It is more productive, however, to resist this impulse. While it is true that almost all gifts involve some form of reciprocation, it is also true that the significance of reciprocation varies considerably from context to context. To observe that there is a continuum in the degree of reciprocation required by transfers-from the anonymous gift or the bequest, which requires no reciprocation, through the political or intra- family contribution, which generates a nonspecific expectation of reciprocation, to the commercial exchange, which produces a powerful 5. See, e.g., PETER M. BLAU, EXCHANGE AND POWER INS OCIAL LIFE 88-112 (1964); MARCEL MAUSS, THE GIFT: THE FORM AND REASON FOR EXCHANGE IN ARCHAIC SOCIETIES (W.D. Halls trans., 1990); WILLIAM MILLER, HUMILIATION 15-52 (1993); Jane B. Baron, Gifts, Bargains, and Form, 64 IND. L.J. 155 (1988-89); Carol M. Rose, Giving, Trading, Thieving, and Trusiing: How and Wy Gifis Become Exchanges, and (More Importantly) Vice Versa, 44 FLA. L. REV. 295 (1992). 6. See, e.g., Hamer v. Sidway, 27 N.E. 256 (N.Y. 1891), in which the court enforced a man's promise to pay his nephew $5000 on his 21st birthday if he gave up smoking, swearing, and gambling; Allegheny College v. National Chautauqua County Bank, 159 N.E. 173 (N.Y. 1927), which involved a charitable contribution. It is hard to know whether to classify the Hamer transaction as a gift or an exchange: it appears to have been altruistic, like most gifts, but there is a quid pro quo. The transaction in Allegheny College was clearly a gift, but the court characterizes it as an exchange (the donor sought memorialization) in order to justify enforcement under the consideration doctrine. The better analysis of both cases turns on an understanding of the motives, discussed infra part II.C, and the social effects of the transactions, discussed infra part Ill. HeinOnline -- 1997 Wis. L. Rev. 569 1997 570 WISCONSIN LAW REVIEW and well-defined expectation of reciprocation-is not to deny that it is useful to divide that continuum into two conceptual categories, gifts and exchanges. Scholars who take reciprocation as a primitive, something that explains other things but is not explained itself, cannot explain why reciprocation arises in some cases but not others. One other terminological note will be helpful. A "gratuitous promise" is a promise to give a gift.7 A "gratuitous transfer" is the actual giving of a gift. As we shall see, this distinction raises the question of why the state is more willing to strike down gratuitous promises than void gratuitous transfers. I shall use the term "gift" or "gift-giving" when the distinction between transfers and promises does not affect the analysis; otherwise, I shall refer to "gratuitous transfers" and "gratuitous promises." Transfers that are not gifts will be called exchange, non-gratuitous, or commercial transfers; likewise for promises that are not gift promises. B. Reciprocal Obligation The concept of reciprocity requires more explanation. It is often assumed that an actor who receives a benefit from a person usually feels a compulsion to provide a return benefit to him. This assumption can be interpreted in two ways. First, it can be interpreted psychologically to mean that people have an urge to reciprocate, and feel guilty if they do not. Second, it can be interpreted sociologically to mean that people feel social pressure to reciprocate. If they fail, they are sanctioned through criticism, gossip, or ostracism. An example of the power of the reciprocity obligation comes from the social psychologist Robert Cialdini. He observed that in airports members of the Hare Krishna sect solicited donations more successfully when they first gave people flowers as "gifts" than when they simply asked for a donation People almost invariably gave a donation of a few dollars after receiving a flower which was virtually worthless.9 So powerful is the reciprocity obligation that potential donees would go to great lengths to avoid receiving the flowers (by changing their routes or by not accepting the flowers) but would not simply refuse to pay after receiving the flower.1 Manipulation of reciprocation norms appears in 7. Courts often use the term "gratuitous promise" to refer to non-gift promises, such as promises to modify one's performance. I adopt the narrower meaning for convenience, and context will make clear when I use the term in the broader sense. 8. RoBERT B. CIALDINI, INFLUENCE 34-35 (1984). 9. Id.a t 35. 10. That no commercial exchange occurred is clear from the fact that the donors would immediately throw away the flowers, which would then be plucked from the HeinOnline -- 1997 Wis. L. Rev. 570 1997 1997:567 Law of Gifts and GratuitousP romises every imaginable context, and it is frequently discussed in sociological and anthropological studies." This example and similar examples in the sociology literature provide evidence that reciprocation is a deep-rooted and powerful norm. The reciprocity obligation is complex.'" Some gifts forbid similar return gifts (for example, one would not give the Hare Krishna follower a flower in return for the flower, or a cake to a neighbor who welcomed one to the neighborhood with a cake). Some gifts require a return gift that is almost but not completely at the discretion of the recipient; in particular, gifts are almost never reciprocated with money (for example, a neighbor who lends you a tool would be offended if you gave him money but not if you lent him some other object on a different occasion). Some gifts are exchanged ceremoniously; other gifts are transferred informally. Gifts often cannot be reciprocated in a precise way, leaving a cloud of doubt around the transaction. Whereas a commercial contract specifies with precision how each party discharges his obligations, one rarely knows how much to spend on a gift that is intended to reciprocate for an earlier gift. When a gift calls forth a determinate response, it begins to look like the consideration for an implicit promise-a promise understood by all from context but not articulated. In politics, the ambiguity between a gift and a non-gift is constantly exploited. If a politician promises to vote for a certain bill in return for a campaign contribution, the contribution is a bribe. When a politician does not make such an explicit promise in return for a contribution, no one really believes that the contribution is gratuitous, but the failure by the parties to make explicit the quid pro quo produces just enough doubt to defeat charges of vote-selling. It is useful to distinguish between "formal" and "informal" gift- giving. Formal gifts include holiday cards, birthday gifts, and other ritualized transfers. Informal gifts are transfers of resources that are not clearly defined and signaled. Examples of donors of informal gifts include the purchasing agent who buys from Firm X because it employs a friend as a sales agent, the academic who gives comments on another's work because that person has commented on his, and the insurance agent garbage can by members of the sect for reuse. id. at 43. 11. See, e.g., JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER 111-14 (1989); MILLER, supra note 5, at 15-52. 12. Useful discussions can be found in BLAU, supra note 5, at 92-95, and MILLER, supra note 5, at 15-52. Empirical investigations of modern gift-giving can be found in Theodore Caplow, Christmas Gifts and Kin Networks, 47 AM. Soc. REV. 383 (1982); Theodore Caplow, Rule Enforcement Without Visible Means: Christmas Gifl Giving in Middletown, 89 AM. J. SOC. 1306 (1984). Since these investigations mostly confirm intuitions, I will not report their results. HeinOnline -- 1997 Wis. L. Rev. 571 1997 WISCONSIN LAW REVIEW who violates some regulations on behalf of an old and trusted client. Formal gift-giving is puzzling in a way informal gift-giving is not. In formal gift-giving the transfers back and forth make the exchanges a wash, economically. Indeed, formal gifts often cost the donor more than they benefit the donee, resulting in a net loss. In contrast, exchange of informal gifts is jointly value-maximizing: when two academics cite each other, read each other's papers, or recommend each other for grants, both are made better off. The solution to the puzzle appears in Part II.E. C. The Motive of Altruism Commentators influenced by law and economics have generally assumed that people give gifts altruistically, i.e., out of a desire to benefit the recipient of the gift. Of course, giving a gift is also costly to the donor. Thus, the donor gives a gift to a donee when the donee's increase in utility causes an increase in the donor's utility that exceeds the loss in the donor's utility resulting from the expenditure of time or money on the gift. 13 I make three comments about the motive of altruism. First, it is an insufficient explanation for gift-giving behavior. Consider the donor who gives gifts to a charity because he cares about the well-being of the charity's beneficiaries. Assume that many people share the donor's concern about the well-being of the beneficiaries and make contributions, and that each person takes every other person's contributions as given. Then any donor would decrease his contribution to a charity when other people increase theirs. Because the well-being of the beneficiaries increases through the other donations, the donor in question has a stronger incentive to spend his money on something else. This result conflicts both with intuition and with evidence. 4 Another phenomenon that cannot be explained by the motive of altruism is that of reciprocal formal gift-giving. If X and Y exchange presents of equal value at Christmas, then each ends up with a commodity rather than money, and this money would be worth worth no less and most likely more to him than the commodity. If the parties entered an agreement not to exchange gifts, then each party would gain from (1) qua egoist, the fact that he has cash rather than a commodity of equal value, 13. For example, suppose that donor gives a painting to donee. If donor values the painting at $100, donee values the painting at $200, and donor obtains utility from the donee's happiness at, say, a 40% discount, then donor obtains $120 worth of utility from donee's acquisition; subtracting the $100 loss, the donor nets $20. The donee, of course, gains $200. 14. See Robert Sugden, On the Economics of Philanthropy, 92 ECON. J. 341 (1982). HeinOnline -- 1997 Wis. L. Rev. 572 1997 1997:567 Law of Gifts and GratuitousP romises and (2) qua altruist, the fact that the other party has cash rather than a commodity of equal value. But such agreements are rarely observed.' Second, supposing for the moment that a reciprocation norm exists (I discuss it in more detail subsequently), such a norm complicates the analysis. If the donor is an altruist, he must take into account the fact that the donee may feel obligated to reciprocate any gift. If the donee has enough resources to reciprocate and does reciprocate, the gift will not necessarily increase the utility of the donee. Parents who give expensive gifts to independent-minded children learn this when the children reciprocate by giving expensive gifts to their parents. As I will discuss later, accepting a gift can also reduce the donee's status relative to the donor. To the extent that the donee cares about his status, this cost may offset the value to him of the gift.'6 Sometimes, the cost of accepting a gift is low. The donee will not feel compelled to reciprocate if the context does not require reciprocation, as sometimes is the case with intergenerational transfers (especially wedding gifts and bequests); as often is the case when the donee is a charitable organization; and as almost always is the case during an emergency such as a natural disaster. The donee will not be able to reciprocate, and often will not feel compelled to reciprocate, if the gift is anonymous. (An anonymous gift, however, may give the donee the disagreeable sensation of feeling pitiable; and to add insult, he has no way of showing that this is not true by declining the gift to the donor's face.) An altruistic donor with sufficient self-consciousness will take into account all these possible costs to the donee when deciding whether and how to give a gift, and will give the gift only if the benefits to the donee exceed these costs. Third, one should distinguish what is sometimes called "impure altruism," which refers to the attitude of a donor who cares not about the donee's utility but about the donee's consumption. For example, parents often pay a child's tuition rather than giving him cash which the child may squander. A Good Samaritan may offer food or clothing to a poor person, rather than money, for fear the recipient would use the money to purchase, drugs. It is important to mention that there is no reason to believe that any particular gift is the product of only one of the three motivations that are identified. Motivations are usually mixed. Many of the gifts conveyed 15. For evidence that altruism is an insufficient explanation for gift-giving, see Donald Cox, Motives for Private Income Transfers, 95 J. POL. ECON. 508, 508-10, 540- 41 (1987). Cox argues that a desire for exchange motivates most gift-giving. Id. For example, parents give gifts to their children in the hope that their children will later support them. This is similar to the trust explanation discussed infra part II.E. 16. See discussion infra part II.D. HeinOnline -- 1997 Wis. L. Rev. 573 1997 WISCONSIN LAW REVIEW between family members and between friends are motivated by altruism; but often other motivations are involved. The same is true of public contributions. D. Status-Enhancing Gifts Many generous gifts are given to prominent charities in a public fashion. Examples include the tycoon who endows a chair in his name or funds a building in his name. As mentioned earlier, altruism does not supply a satisfactory explanation of philanthropic giving. It does not explain why people do not decrease their giving as a charity becomes wealthier; it also does not explain why large gifts are conveyed in a highly public way.1 One might argue that public charitable gifts are actually disguised sales. The university sells its right to name a building after someone else to the "donor" in return for the latter's money. This description, however, does not capture what is special about the transaction. Universities resist the temptation to sell the right to name buildings to wealthy scoundrels out for a cheap way to repair their reputations. Like the politician who receives a campaign contribution, the university maintains a formal, even if rarely exercised, right of discretion. The reason that universities do not simply sell titles and positions is that their prestige would be destroyed if they were routinely sold, just as the prestige of the Nobel prize would be destroyed if it were auctioned to the highest bidder. The Reformation taught the Catholic Church a similar lesson about the difference between the price and the value of indulgences. In a phrase, people value reputations for generosity, ingenuity, and fair-mindedness; but if one could purchase such reputations, then they would cease to exist. 8 17. Charitable gifts are rarely made anonymously. Anonymous gifts accounted for 1.29% of the donations to the Pittsburgh Philharmonic, and for less than 1% of the donations to Yale Law School, Harvard Law School, and Carnegie Mellon University. Amihai Glazer & Kai A. Konrad, A Signaling Explanation for Charity, 86 AM. ECON. REv. 1019, 1021 (1996). Glazer and Konrad also point out that the motive of altruism cannot explain why people typically make gifts at the lowest value in the range by which donors are classified in published reports. Id. For example, 93% of those who contributed to the Harvard Law School Fund in the category of $500-$999 made contributions of $500. Id. People motivated by altruism would presumably give gifts along a broader distribution. 18. This is not to say that universities can always resist skating close to the line. A recent article discussed the method of the University of California at Irvine: "[The potential donor, Mr. Barclay] asked the magic question: What does it cost to put your name on something?" recalls Terry Jones, a former UCI development officer who handled the Barclay gift. . . . Mr. Jones says HeinOnline -- 1997 Wis. L. Rev. 574 1997 1997:567 Law of Gifts and Gratuitous Promises To analyze this phenomenon, it is useful to introduce the concept of status. This concept, which refers to a person's rank in a hierarchy, can be modeled in various ways. Recent writings on the subject often assume that status is an index of one's wealth or conformity to important moral values, for example, honesty or generosity, but it can be a function of whatever is valued in a particular group-beauty, prowess as a warrior, strength, shrewdness, chess-playing talent, musical skill, piety, or any combination. One difficulty in discussions of status is that valued qualities differ from subculture to subculture. Sometimes one obtains status from having a distinguishing talent; sometimes one obtains status from always behaving in moderation. The literature does not untangle these problems but it makes some progress. One approach assumes that people obtain status by being known to have great wealth. 9 Because one's wealth is not easily observable, to prove to others that one has wealth, one must take actions that only wealthy people can take. Such actions include conspicuous consumption and conspicuous donation.' Another approach assumes that people obtain status by being known to have good dispositions or talents-for example, the disposition of generosity.2 The problem, again, is that one's generosity is not observable. To prove to others that one is generous, one must take actions that only generous people take, including lavish gift-giving.' Both approaches contain elements of the truth: people want others to think that they are wealthy and generous, not Mr. Barclay was pitched several "naming opportunities"-projects that would be named in his honor in exchange for a contribution-and "his eyes kind of lit up at the theater." After a series of negotiations, he agreed to the $1 million, payable in $200,000 installments over five years. After that, the Barclays were treated more or less likely royalty. Mrs. Barclay, for example, was "knighted" at an elaborate ceremony put on by the university's madrigal society. The couple was saluted at luncheons, cocktail parties and the gala review. And they were given other tokens of affection, including his-and-hers windbreakers bearing the university's Anteaters logo. Richard B. Schmitt, UncharitableA cts: If Donors Fail To Give, More Nonprofit Groups Take Them To Court, WALL ST. J., July 27, 1995, at Al. 19. Glazer & Konrad, supra note 17, at 1019-21. 20. Id. at 1020. 21. See B. Douglas Bernheim, A Theory of Conformity, 102 J. POL. ECON. 841, 842-46, 864-66 (1994). 22. See generally JAMES COLEMAN, FOUNDATIONS OF SOCIAL THEORY 129-31 (1990); ROBERT H. FRANK, CHOOSING THE RIGHT POND: HUMAN BEHAVIOR AND THE QuEST FOR STATUS (1985); Richard H. McAdams, Relative Preferences, 102 YALE L.J. 1 (1992) (and citations therein). Economic theories of status trace their origin to THORSTEIN VEBLEN, THE THEORY OF THE LEISURE CLASS: AN ECONOMIC STUDY OF INSTITUTIONS (1953). HeinOnline -- 1997 Wis. L. Rev. 575 1997