Receiving favors is often a mixed blessing and commonly triggers two emotions: the positive emotion gratitude and negative emotion indebtedness. In three studies we examined the hypothesis that gratitude and indebtedness have distinct functions in social exchange. Contrary to current views, we believe that the function of gratitude does not primarily reside in facilitating social exchange. Instead, we propose that indebtedness motivates people to repay favors received, and thus accounts for most of the prosocial effects commonly attributed to gratitude. On the other hand consistent with current views, we believe that gratitude signals the potential for developing a relationship and fosters proximity seeking. Supporting these assumptions, in Study 1 we found that gratitude and indebtedness were associated with aspects of the favor that reflect the concern for relationship and the level of inequity. Studies 2-3 causally supported these relations, and revealed the unique associations between gratitude and the motivation of proximity seeking, and between indebtedness and the motivation to reciprocate. We argue that this functional distinction has escaped research attention as gratitude and indebtedness are naturally correlated because they stem from the same eliciting event. To appreciate this functional distinction, both emotions should be studied simultaneously in the context of social exchange.