What do you do if someone you don't like tries to give you an expensive present? Homo economicus would happily take it: "It's not like I signed a contract!" But most people would at least think twice before accepting the gift.
Why is this? My best guess is that (a) Our natural psychological reaction to a favor is gratitude and a desire to reciprocate, and (b) We are rational enough to foresee our reaction and try to avert it. Broadly construed, refusing a gift is a selfish act, because you know that if you take this payment, you will pay it back, even though you don't have to.
Examples are everywhere. Charities often raise money by giving you free stuff. They love to send people free return address labels. Their hope is that people will feel obligated to repay the favor. In fact, their hope is that people will feel obligated to respond with a donation that massively exceeds the trivial cost of the labels.
Another interesting case: Eli Berman of UC San Diego observes that terrorism is often bundled with philanthropy. Groups like Hamas don't just deploy suicide bombers; they also run schools, hospitals, welfare programs, and so on.
Members of these radical religious groups are hardly your typical “bad guys.” They
exhibit productive, constructive and noble behaviors: acts of piety, charity and self-sacrifice.
Why do the two come as a package? Berman's interpretation is that these groups initially attract members by supplying "club goods" - that is, collective benefits for their supporters. Once people enjoy the group's club goods, it can induce them to sacrifice for the group by threatening to throw them out of the club for free-riding.
The bundling of violence and charity is striking, but I have a slightly different take on it. Philanthropy helps recruit terrorists, but the reason is not that the club ejects free-riders. The reason philanthropy helps is that it makes people feel grateful, which leads to a desire to return the favor. For the most part, people return the favor the cheap way: Not ratting them out to their enemies. But some recipients go further and become terrorists out of gratitude.
The upshot is that economists overestimate the severity of public goods problems but underestimate the severity of rent-seeking.
Public goods problems are less of a problem than we usually think because people are inherently uncomfortable with free-riding. Our emotional constitution urges us to repay favors.
Unfortunately, our sense of gratitude also paints a target on our backs for rent-seekers. Think of it this way: You can turn a profit if you can figure out a cheap way to make people feel like they owe you. Since people probably would rather not accept your gift in the first place, the trick is to send them a gift "they can't refuse." Mail them return address labels, or just loudly do things that "help everyone in the community."
Giving people stuff for free might seem like an absurd way to earn a profit, but normal human emotions make it a viable business model.
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