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Face Value: Information and Signaling in an Illegal Market

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Author Info
Trevon Logan
Manisha Shah

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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 premium to information and that it is due entirely to face pictures. More importantly, the premium is in the range of premiums to information estimated for legal markets. We also show that the evidence is inconsistent with alternative explanations such as beauty premiums. The findings provide novel evidence on the ability of rich information environments to overcome the problems of asymmetric information without formal enforcement, and show that the value of information in illegal markets is similar to its value in legal markets.

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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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Handle: RePEc:nbr:nberwo:14841

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Find related papers by JEL classification:
D4 - Microeconomics - - Market Structure and Pricing
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
J4 - Labor and Demographic Economics - - Particular Labor Markets
K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
L8 - Industrial Organization - - Industry Studies: Services

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  1. Hoff, Karla & Kshetramade, Mayuresh & Fehr, Ernst, 2009. "Caste and Punishment: The Legacy of Caste Culture in Norm Enforcement," IZA Discussion Papers 4343, Institute for the Study of Labor (IZA). [Downloadable!]
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