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Face Value: Information and Signaling in an Illegal Market

  • Trevon D. Logan

    ()

    (The Ohio State University and NBER, 410 Arps Hall, 1945 North High Street, Columbus, OH 43210, USA; corresponding author.)

  • Manisha Shah

    ()

    (University of California, Los Angeles and NBER, 3250 Public Affairs Building, Los Angeles, CA 91195;)

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 data set from the largest and most comprehensive online male sex worker Web site 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 institutional knowledge, we identify the specific signal male sex workers use to communicate quality to clients: face pictures. We find that there is a substantial return to the signal in this market. The findings provide novel evidence on the ability of rich information environments to overcome problems of asymmetric information without formal enforcement mechanisms.

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File URL: http://dx.doi.org/10.4284/0038-4038-2011.119
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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 79 (2013)
Issue (Month): 3 (January)
Pages: 529-564

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Handle: RePEc:sej:ancoec:v:79:3:y:2013:p:529-564
Contact details of provider: Web page: http://www.southerneconomic.org/

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