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Face Value: Information and Signaling in an Illegal Market

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  • Trevon Logan
  • Manisha Shah

Abstract

Economists argue that rich information environments and formal enforcement of contracts are necessary to prevent market failures when information asymmetries exist. We test for the necessity of formal enforcement to overcome the problems of asymmetric information by estimating the value of information in an illegal market with a particularly rich information structure: the online market for male sex work. We assemble a rich dataset from the largest and most comprehensive online male sex worker website to estimate the effect of information on pricing. We show how clients of male sex workers informally police the market in a way that makes signaling credible. Using our institutional knowledge, we also identify the specific signal male sex workers use to communicate quality to clients: face pictures. We find that there is a substantial return to information, and that it is due entirely to face pictures. Interestingly, the return is in the range of returns to information estimated for legal markets. We also provide suggestive evidence that our premium to face pictures is not being driven by a beauty premium. The findings provide novel evidence on the ability of rich information environments to overcome the problems of asymmetric information without formal enforcement mechanisms.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14841.

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Date of creation: Apr 2009
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Publication status: published as Trevon D. Logan & Manisha Shah, 2013. "Face Value: Information and Signaling in an Illegal Market," Southern Economic Journal, Southern Economic Association, vol. 79(3), pages 529-564, January.
Handle: RePEc:nbr:nberwo:14841

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Cited by:
  1. Karla Hoff & Mayuresh Kshetramade & Ernst Fehr, 2011. "Caste and Punishment: the Legacy of Caste Culture in Norm Enforcement," Economic Journal, Royal Economic Society, vol. 121(556), pages F449-F475, November.
  2. Jason Chan & Anindya Ghose, 2012. "Internet's Dirty Secret: Assessing the Impact of Online Intermediaries on the Outbreak of Sexually Transmitted Diseases," Working Papers 12-07, NET Institute, revised Sep 2012.
  3. Cunningham, Scott & Kendall, Todd D., 2011. "Prostitution 2.0: The changing face of sex work," Journal of Urban Economics, Elsevier, vol. 69(3), pages 273-287, May.

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