A Market for Paid Sex

What will economists say about a market for paid sex?. Steven Levitt (Chicago’s economist, co-author of best selling book Freakonomics) and Sudhir Venkatesh (Columbia’s sociologist) did empirical analysis on street-level prostitution. Their research on the economics of street level prostitution uses official arrests record and field data on 2,200 transactions, collected from sex workers in three Chicago districts. Their work’s preliminary finding was presented in the Annual Meeting of American Economic Association on January 2008.

Here are main findings:

Prostitution, as a market, is highly concentrated in few locations. Yes, because prostitutes and their clients need to find each other easily. The market is large too. They estimate there are 4,400 street prostitutes active in Chicago in an average week.

Prostitutes earn premium wages, about $25-$30 per hour. It is about four times higher than they can earn in other productive activities. Yet, taking into account job risks, this amount is relatively meager compensation. The norm of sex without a condom and regular violent assault at least once a month is among the risks. Despite, the risk of legal action is low, opportunity costs can be high, since prostitutes are more likely to have sex (without get paid) with a police officer than to be arrested by one.

Prostitutes are also practicing pricing strategy. They maximize returns by segmenting market and assessing client’s perceived ability and willingness to pay. White customers are generally charged higher than black ones. There is a paradox. Though price increases along higher risks, but price premium for unprotected sex is small.

Supply of prostitutes is relatively elastic in a location where more people gathered for a national occasion. The 30% price hike could boost supply by 60%. Supply was flexible because regular prostitutes worked for more hours and prostitutes in other locations came in plus some seasonal prostitutes who are willing to offer sex service for higher wages.