Trading Tricks: The Economics of Prostitution

Published May 18th, 2009 - 04:59 GMT

Trading Tricks: The Economics of Prostitution
An empirical analysis of the world’s oldest profession

Most crimes involve a victim and a perpetrator. The perpetrator typically looks for his victim and the victim avoids the perpetrator as much as he can. The crime of prostitution, however, is quite different. There are two parties involved but it isn’t clear who the perpetrator is and who the victim is. Moreover, it is in the interest of both the prostitute and the client to do their best to find one another. As a result, prostitution operates just like a market: it is populated by buyers and sellers who mutually benefit when they come together to perform a transaction.

In a new study, “An Empirical Analysis of Street-Level Prostitution,” University of Chicago Booth School of Business professor Steven D. Levitt and Sudhir Alladi Venkatesh of Columbia University, find that prostitution is much like any other business and uncover intriguing answers to such questions as: How do prostitutes and their customers, or “johns,” find one another? How much do prostitutes charge for a service, or “trick,” and how is that price negotiated? If a john prefers not to use a condom, how much more does he have to pay? How does a prostitute’s wage compare to what she earns for doing other jobs? What happens when there’s a sudden surge in demand for prostitutes, and how do prostitutes meet this demand?

The difficulty of obtaining reliable data is partly to blame for the dearth of empirical analysis on the subject, but by using publicly available information from the Chicago Police Department and, more importantly, the help of pimps and prostitutes to detail the transaction data of over 2,200 tricks performed by about 160 prostitutes, the authors were afforded a rare glimpse into the business of prostitution, as well as a unique window to view the workings of the inner city that may have been difficult to reveal otherwise. “In the end, our study is not just about prostitution, but also about the lives of the people of the inner city,” Levitt says.
Location and organisation
Prostitutes want to be where their customers can easily find them, so they tend to cluster in areas well-known to their clients much like stores do in shopping malls. Traditional marketing channels, however, are not open to them. Thus, plying their trade along stretches of major roads is an easy way for customers to survey the market without appearing suspicious.
Prostitutes who work for pimps appear to do better than those who do not, typically working fewer hours and performing fewer tricks but still earning more money.

The authors estimated that women who work without pimps earn about $25 per hour while those working with pimps earn 50 percent more.
It isn’t clear why pimps would be willing to pay a rate that is above the minimum required, or what economists call an “efficiency wage.” One possible explanation is that it’s hard for pimps to always keep an eye on the women they manage. Pimps want repeat customers, so they have to make sure that the prostitutes are serving their clients the way the pimps would want them to. By paying more, pimps effectively raise the penalty associated with being fired, which will hopefully induce better behavior on the part of the prostitutes.

The price of a trick
The fee for a trick varies with the type of sex act, and prostitutes seem to discriminate across clients in order to maximize profit. White men pay $8 to $9 more per trick than black customers, with Hispanic clients paying some amount in between. When bargaining, prostitutes will usually offer a price to a black customer but will make a white man throw out a number first. Repeat customers pay slightly less than new customers.

The overall price of a trick goes up by $2 if a condom is not used. Although the price premium increases with the risk associated with a particular sex act, it is much smaller than the 24 percent premium that another study reports in a survey of Mexican prostitutes. One possible way to understand this disparity is to look at where the point of bargaining begins. Using a condom is the norm in Mexico, while no condom is the default in Chicago unless the customer bargains toward it, which might make it harder for the prostitute to credibly argue for a higher price.

Crime and punishment
The study estimates that prostitutes are arrested only once in every 450 tricks, but only one in ten of these arrests will lead to a prison sentence. Only one john is arrested for every 1,200 tricks. Perhaps more striking is the rate at which a police officer can extort free sex from a prostitute. Levitt and Venkatesh found that about one in 30 tricks performed by a prostitute is a freebie to the police in return for avoiding arrest. In other words, a prostitute is more likely to have sex with an on-duty police officer than to be arrested by one.

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