Economics of Prostitution

1. Economics of Prostitution Econ 3670 Applications of Choice Theory Roberto Martinez-Espiñeira

2. Number of Prostitutes in Western European Countries (2000)

3. Why do we study prostitution? • It is a way to spend your leisure time • It is (for the suppliers) a job • However it is difficult to model it as other, more conventional, jobs • It is related to the market for drugs • It is a crime (to sell or buy) in many places • It is a risky activity in most places • It can help us understand issues about dating and marriage

4. Number of Prostitute Arrests in US

5. The Legal Status of Prostitution • Prostitution is legal and pimping is permitted • Austria, the Dominican Republic, Singapore and Switzerland • Prostitution is legal but pimping not permitted • Australia, Germany, Honduras, Hungary and the Netherlands • Prostitution is illegal but “tolerated” • China, Japan, and United Arab Emirates • Legal in Nevada (US), illegal in every other state • Prostitution is illegal and punishable by death • Iran, Iraq (until recently), and Afghanistan (February 2001, > 1000 people watched while two women convicted of prostitution were hanged in Kandahar sports stadium)

6. Definition of Prostitution • A dictionary definition of prostitution might be “the undertaking of sexual actions for payment” • But some married women satisfy the definition routinely within marriage (Edlund and Korn, 2002)  • In fact, that is probably why women worry usually worry more about having prostitution around than men… • It is a substitute for the commodity they sell

7. Definition of Prostitution • A dictionary definition of prostitution might be “the undertaking of sexual actions for payment” • But some married women satisfy the definition routinely within marriage (Edlund and Korn, 2002)  • Edlund and Korn (2002) prefer a definition in terms of payment for sex that is non-reproductive from the purchaser’s point of view (we will assume this definition throughout)

8. Definition of Prostitution • Edlund and Korn (2002) prefer a definition in terms of payment for sex that is non-reproductive from the purchaser’s point of view • That is why we insisted that in marriage the main idea is that a man will have sex with someone who, if it comes to it, will have HIS children • That is not the case with prostitution

9. Edlund and Korn (2002) • Prostitution is more common in less developed countries but it is also common in developed ones • Strangely, prostitution is well paid despite being low-skill, labor intensive, and, one might add, female dominated • The key to this puzzle may lie in the following observation: a woman cannot normally be both a prostitute and a wife

10. Edlund and Korn (2002) • The key to this puzzle may lie in the following observation: a woman cannot normally be both a prostitute and a wife • Empirically, unmarried women are overrepresented among prostitutes

11. Edlund and Korn (2002) • Married men are underrepresented among clients • However, they constitute the bulk of demand!!! • See why in Edlund and Korn (2002) and : • Siow, Aloysius. “Differential Fecundity, Markets and Gender Roles.” Journal of Political Economy. 106 (April 1998): 334–54.

12. Edlund and Korn (2002) • There may be some value to promiscuity • This love of variety might be more widespread among males (perhaps from greater reproductive rewards thereof) • Alternatively, women and men may be equally inclined towards variety, but women would have a higher opportunity cost of exercising this promiscuity from its incompatibility with marriage

13. Edlund and Korn (2002) • Another possibility: women are fecund for a shorter period than men and hence are scarce on the partner market • Sex with an old woman may be inferior to sex with a young woman • In a population of men and women who live for two periods: young and old women are fecund when young, men are fecund when both young and old

14. Edlund and Korn (2002) • marriage and sex are desirable only with a fecund partner • Then men can marry at either age, whereas women marry only while young • If the only reason for divorce is remarriage, then men who married while young remain married when old unless they can remarry a young woman

15. Edlund and Korn (2002) • There will be more men willing to marry than young women => not all old men can remarry • These men would remain married but seek sex with a young woman. If young married women are barred from extramarital relations, only prostitutes can satisfy this demand

16. Edlund and Korn (2002) • As we saw before, marriage can be an important source of income for women • since they have a great comparative advantage at having children (they supply fecundity and control parenthood rights) • it follows that prostitution must pay better than other jobs to compensate for the opportunity cost of forgone marriage market earnings

17. Edlund and Korn (2002) • if a man’s willingness to support a wife exceeds his WTP for a prostitute and if the supply of women in a group is largely fixed • this is perhaps why prostitutes are promiscuous and • why prostitution is prevalent wherever large numbers of men congregate temporarily • prostitution is less prevalent in developed countries • Because females are richer and • also because men are richer

18. Edlund and Korn (2002) • Prostitution is a very imperfect substitute for other sexual relationships • It is one of these examples where attaching a price to something in itself changes the customer’s WTP for it

19. Prostitution: A Secondary Market • From an economist’s point of view, a key feature of prostitution is that it is a secondary market (SM) • Analogous to Doeringer and Piore (1971) who apply idea to labor market • Primary segment of labor market: high wages, good working conditions, chances of advancement, employment stability • Secondary segment: low pay, poor working conditions, and lack of stability and advancement prospects

20. Prostitution: A Secondary Market • In the market for sex, the primary market is the market for marriage • Both parties derive long-term benefits, analogous to career advancement, from a lasting relationship • In comparison, the benefits from either consuming or supplying a commercial sex activity are strictly short-term and highly superficial

21. Prostitution: A Secondary Market • By distinguishing the secondary market from the primary market, it is possible to derive an economic model which solves the wage differential puzzle • i.e. a model which is capable of explaining the significant excess of the wage earned in the prostitution industry over that earned, with similar skill levels, in other industries • Also, the distinction between the primary and secondary market is useful because it allows clear explanation of the ways in which the existence of the prostitution market may be seen to enhance societal welfare • Acts as the overflow mechanism necessary for the non-commercial market to function in equilibrium

22. Economic Theories of Prostitution • Earnings per hour are very high in a profession characterized by: • very basic skill and capital requirements • low fixed costs • no formal training requirements/barriers to entry • Moffatt and Peters (2004) recently used UK data to estimate that the weekly earnings of a typical prostitute are roughly two times that of non-manual workers and three times that of manual workers

23. Economic Theories of Prostitution • Three approaches to solving this wage differential puzzle • (1) Demand-Side • Della Giusta et al. (2004) develop theory which assumes that males are willing to pay a premium to avoid “hidden” costs of obtaining so-called “unpaid” sex such as wining and dining, gifts, and the consequences of long-term commitment • (2) Supply-Side • Attribute the earnings premium to compensation necessary for risk of violence, risk of contracting STDs, and for generally unpleasant physical experiences that prostitution entails

24. Economic Theories of Prostitution • (3) Opportunity Cost of Prostitution • Foregone marriage opportunities • Underlying assumption here is that marriage and prostitution are incompatible for a female • Not universally true but evidence of difficulties faced by women attempting to do both • Even loss of virginity considered serious penalty in some societies • Edlund and Korn (2002) follow this approach and develop a model which predicts that the number of prostitutes falls in response to increase in female wage earned in alternative employment

25. Entry into Prostitution • Absence of entry barriers • required qualifications and professional organizations do not really exist • One entry barrier may be male managers of massage parlors “trying out” new employees • Those entering the lower end of the spectrum may be subject to informal barriers such as threat of physical violence from incumbents or their associates

26. Market Structure • Most common is collection of sole traders acting independently and competitively • in many UK cities, locations from which more than two providers operate are unlawful and are closed down if detected • Such incentives create ideal conditions for competitive market • Some evidence of collusive behavior with all providers operating in a particular area committing to same prices with (possibly violent) punishment strategies in place for deviators • The Impact of a Pimp • Once enterprise takes on third-party gainer, changes from sole trader to small firm • Providers controlled by pimps face higher costs than those without and are more easily driven out of market

27. The Effects of Asymmetric Information • Presence of asymmetric information in prostitution market may mean actual price paid by client is even higher • Highly relevant in markets with “transient” consumers • Holidaymakers buying sex who have no local knowledge of market price • Market price is considerably lower than that prevailing in client’s home country • Providers maximize consumer surplus they extract by engaging in first-degree price discrimination

28. Effects of Asymmetric Information • Asymmetric information also arises because advertisements appearing in newspapers, magazines, Internet etc. are posted by providers • Tendency to give misleading description of provider and quality of their services • One negative outcome is a version of Gresham’s Law: high quality providers tend to be driven out of market by those of lower quality (just like second hand cars)

29. Empirical Studies of Prostitution • Cameron and Collins (2003) • Use large UK lifestyle data set to identify characteristics of males which determine demand for prostitution • Dependent variable is binary: 1 if respondent has purchased sex, zero otherwise • Find that most important determinants of participation are religion and risk disposition

30. Empirical Studies of Prostitution • Rao et al., (1999) • Investigate the determinants of price paid for sex in India • Focus on impact of condom use which they find to have a strong negative impact on price • Has societal implications for health and education policy as unprotected sex with prostitutes is one of the primary causes of the spread of HIV/AIDS in developing countries

31. Empirical Studies of Prostitution • Moffatt and Peters (2001) • Carried out an empirical study of the sex market in the UK, using data extracted from the Punternet website (www.punternet.com) • Site is an informational exchange for clients • Clients submit “field reports” on prostitutes whom they have recently “encountered” • Contains the location and duration of encounter, working-name and contact details of provider, information about prostitute’s physical attributes and personality, services rendered, price paid • Site is heavily used: as at June 18 2006, over 61,169 reports

32. Empirical Studies of Prostitution • Moffatt and Peters (2001) used the Punternet data to investigate way in which prices of prostitutes’ services are determined • Focus on demand side of market and estimate value perceived by clients of service, assuming supply to be fixed • An example of hedonic pricing • Also use information on whether or client would return to same provider in future • Yields a binary variable which may be an indicator of client satisfaction • In a smoothly functioning market, it should be the case that any product attribute which increases consumer satisfaction also increases price

33. Empirical Studies of Prostitution • Selected sample consists of 982 complete reports that were submitted to the site between January 1999 and July 2000 • The figure on shows a histogram of per ‘encounter’ price paid in pound sterling • Price distribution has a clear mode at £60 and shows a strong positive skew

34. Empirical Studies of Prostitution

35. Empirical Studies of Prostitution • The next figure shows a scatter plot of price against duration of encounter in minutes • From the smooth, a clear positive relationship is identifiable and, interestingly, a small degree of convexity is detected • The marginal effect of duration on price becomes higher at higher values of duration • Suggesting the possibility of market segmentation, with longer durations typically being associated with a higher class of provider, namely the escort

36. Empirical Studies of Prostitution

37. Empirical Studies of Prostitution • Now we see a scatter plot of price against age of provider in years • Non-linearity is again evident • The relationship is fairly level at low ages, but beyond the age of around 35, price appears to decline monotonically

38. Empirical Studies of Prostitution

39. Empirical Studies of Prostitution • A regression was performed using the sample of 982 observations with price of encounter in pound sterling as the dependent variable and a set of explanatory variables including duration of encounter, provider characteristics, arrangement dummies, type of service, and regional dummies

40. 24 Determinants of Price of Sex – OLS Results

41. Empirical Studies of Prostitution • One of the pieces of information supplied in each report is whether or not the client would wish to return to the same provider in future • Of the 982 reports used in this study, 202 clients reported that they would not return • Logistic regression results follow

42. Binary Logit Results from Analysis of Satisfaction Variable

43. Policy and Prostitution • Models of legalization • “Laissez Faire” or “Tolerance” model • Government and police intervention kept to a minimum • Model often occurs in large cities where police are over-burdened with more serious crimes of where local economy relies upon adult tourism • Thailand’s sex industry is thought to account for 14% of GDP

44. Policy and Prostitution • Models of legalization • “Regulation” model • Characterized by a licensing system • Recently applied by US Government to prostitutes operating near US-Mexico border • Licenses are not permits to prostitute; means of controlling activities to a degree (keep health standards, detecting illegal trafficking of women, etc.) • Useful for maintaining health standards, detecting illegal trafficking of women, and possibly even for tax collection

45. Policy and Prostitution • Models of legalization • “Zoning” model • Situation in which minimum physical distance is set between residential areas and locations where prostitution establishments are permitted • Common in many European cities • Benefits all parties • Police find it easier to control conduct of both providers and clients • For clients, choice is maximized and search costs minimized • For providers, complete market can be reached without need for advertising

46. Concluding Thoughts • Each model has attractions and limitations • Legalization may change the nature of product in eyes of client and reduce demand • Perhaps, there are some clients who are drawn to commercial sex precisely because it is illegal, sordid, risky, even dangerous • Perverse desire on part of human males may be a further explanation of high compensating wage differential • Whether or not we believe in legalization, the government should have a paternalistic role to play • At the very least, there is a need to reduce the barriers to exit for many prostitutes from the industry