This paper shows that reciprocity has powerful implications for many economic domains. It is an important determinant in the enforcement of contracts and social norms and enhances the possibilities of collective action greatly. Reciprocity may render the provision of explicit incentive inefficient because the incentives may crowd out voluntary cooperation. It strongly limits the effects to competition in markets with incomplete contracts and gives rise to noncompetitive wage differences. Finally, reciprocity is also a strong force contributing to the existence of incomplete contracts. Reciprocity is fundamentally different from "cooperative" or "retaliatory" behavior in repeated interactions. These behaviors arise because actors expect future material benefits from their actions; in the case of reciprocity, the actor is responding to friendly or hostile actions even if no material gains can be expected. Reciprocity is also fundamentally different from altruism. Altruism is a form of unconditional kindness; that is, altruism given does not emerge as a response to altruism received. Again, reciprocity is an in-kind response to beneficial or harmful acts. Examples for retaliatory behavior abound. Many wars and gang crimes fit well into this category. A vivid example is provided by the recent events in Kosovo when many Albanian refugees took bloody revenge after the victory of NATO over Serbian forces. Other examples are given by the rise in employees' theft rates after firms have cut employees' wages (Giacalone and Greenberg, 1997) or by the social ostracism exercised by coworkers against strike breakers during and after industrial disputes. Likewise, positive reciprocity is deeply embedded in many social interactions. Psychological studies show, for example, that smiling waitresses get tipped much more than the less friendly ones (Tidd and Lochard, 1978). Calls for contributions to charities are often accompanied by small gifts. Apparently, charities believe that this raises the propensity to donate. Uninvited favors, in general, are likely to create feelings of indebtedness obliging many people to repay the psychological debt. A particularly powerful example of this is the use of free samples as a sales technique (Cialdini 1993). In supermarkets customers are frequently given small amounts of a certain product for free. For many people it seems to be very difficult to accept samples from a smiling attendant without actually buying anything. Some people even buy the product although they do not like it very much. The normative power of reciprocity is also likely to have an important impact on social policy issues (Bowles and Gintis, 1998). Social policies are much less likely to be endorsed by public opinion when they reward people independent of whether and how much they contribute to society. Since in real world interactions, it is very difficult to rule out with certainty that an actor derives a future material benefit from a reciprocal response, we provide in the following evidence on reciprocity from controlled laboratory experiments. In these experiments, real subjects interact anonymously and face real, andThis paper shows that reciprocity has powerful implications for many economic domains. It is an important determinant in the enforcement of contracts and social norms and enhances the possibilities of collective action greatly. Reciprocity may render the provision of explicit incentive inefficient because the incentives may crowd out voluntary cooperation. It strongly limits the effects to competition in markets with incomplete contracts and gives rise to noncompetitive wage differences. Finally, reciprocity is also a strong force contributing to the existence of incomplete contracts. Reciprocity is fundamentally different from "cooperative" or "retaliatory" behavior in repeated interactions. These behaviors arise because actors expect future material benefits from their actions; in the case of reciprocity, the actor is responding to friendly or hostile actions even if no material gains can be expected. Reciprocity is also fundamentally different from altruism. Altruism is a form of unconditional kindness; that is, altruism given does not emerge as a response to altruism received. Again, reciprocity is an in-kind response to beneficial or harmful acts. Examples for retaliatory behavior abound. Many wars and gang crimes fit well into this category. A vivid example is provided by the recent events in Kosovo when many Albanian refugees took bloody revenge after the victory of NATO over Serbian forces. Other examples are given by the rise in employees' theft rates after firms have cut employees' wages (Giacalone and Greenberg, 1997) or by the social ostracism exercised by coworkers against strike breakers during and after industrial disputes. Likewise, positive reciprocity is deeply embedded in many social interactions. Psychological studies show, for example, that smiling waitresses get tipped much more than the less friendly ones (Tidd and Lochard, 1978). Calls for contributions to charities are often accompanied by small gifts. Apparently, charities believe that this raises the propensity to donate. Uninvited favors, in general, are likely to create feelings of indebtedness obliging many people to repay the psychological debt. A particularly powerful example of this is the use of free samples as a sales technique (Cialdini 1993). In supermarkets customers are frequently given small amounts of a certain product for free. For many people it seems to be very difficult to accept samples from a smiling attendant without actually buying anything. Some people even buy the product although they do not like it very much. The normative power of reciprocity is also likely to have an important impact on social policy issues (Bowles and Gintis, 1998). Social policies are much less likely to be endorsed by public opinion when they reward people independent of whether and how much they contribute to society. Since in real world interactions, it is very difficult to rule out with certainty that an actor derives a future material benefit from a reciprocal response, we provide in the following evidence on reciprocity from controlled laboratory experiments. In these experiments, real subjects interact anonymously and face real, and