A note on the strategic aspects of the transfer paradox

It is well known that an agent can be hurt by accepting a gift, the donor of which is made better off. Why then does the recipient accept this welfare reducing gift? This paper examines the strategic aspects of the paradox. It shows that if the recipient refuses the gift, it would suffer an even greater loss of welfare since there is a mutually advantageous reallocation between the donor and a third agent. It is shown that the recipient does have a viable alternative strategy: it could destroy some of its endowment, raising its welfare level and reducing that of the potential donor.