Face Value: Information and Signaling in an Illegal Market [updated]

This working paper from Trevor Logan and Manisha Shah looks interesting. 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 the premium to information is large 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.

(Hat tip: Mike Munger. The post also points to some cool looking evo-psych papers.)

Update: Paul Walker at Anti-dismal blogged about the paper a few days ago. I knew I’d seen it mentioned before, but couldn’t remember where. Paul’s post is very good, and I have no excuse for not pointing to it from the start.

2 Responses

  1. Brad, may I be so bold as to point out this this posting, Markets and asymmetric information, from Monday, 27 April 2009.

  2. Sorry Paul. I did read that post too. Information overload.

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