Social networks and externalities from gift exchange: Evidence from a field experiment

•When patients give a small gift, doctors reciprocate with better service and a fewer unnecessary prescriptions.•Gift giving creates positive externalities for third parties associated with the gift giver.•Gift giving creates negative externalities for third parties not associated with the gift giver.

This paper asks whether gift exchange generates externalities for people outside of the bilateral relationship between the gift giver and recipient, and whether the nature of this relationship is affected by social networks. We examine this question in the context of a field experiment in urban Chinese hospital outpatient clinics. We first show that when patients give a small gift, doctors reciprocate with better service and a fewer unnecessary prescriptions of antibiotics. We then show that gift giving creates externalities for third parties. If two patients, A and B are perceived as unrelated, B receives worse care when A gives a gift. However, if A identifies B as a friend, then both A and B benefit from A's gift giving. Hence, we show that gift giving can create positive or negative externalities, depending on the giver's social distance to the third party.