Mirror, mirror on the wall, is the courtesan economical after all?
Rudraneel Sinha
B.Sc. Econ (FY)
Reading Time – 5-7 minutes
Do you know a job that has low barriers to entry, requires no formal education requirements, and pays wages that exceed the average barista’s or any individual working in the service sector? At first, you might be thinking that I’m just fooling around, but I’m not! You see, there is a job like the one I mentioned above, and it is also one of the oldest known to humankind. The answer is prostitution.
You guys must be thinking, what does prostitution have to do with economics? A lot, I would say. Keeping all the cultural and societal taboos apart, when we look at sex work from an economic lens, we can see that this shadow market operates as per rational economic laws. Now this shadow market refers to the unregulated, underground, criminal networks through which commercial sex is bought, sold, and managed. It operates in the hidden, informal, or “grey” areas of the economy, distinct from the legal, regulated, or “white” market of sex work in regions where it is permitted. Instead of shaming or looking down on them for what they do, let us look at the entire industry from a different perspective.
Prostitution has a pretty wild aspect to it because it’s surprisingly well-paying, even though it doesn’t require much skill and is super labor-intensive. For example, there were reports from Sweden back in 1998 where prostitutes could earn around SEK 14,000 (about $1,750) in a single day, which is what someone might earn in a whole month at a regular unskilled job. The Economist even reported that Arab women could earn $2,000 a night in the Gulf states. All of this leads us to the question of how in the world do these sex workers earn more than an individual who is working in any other field? Well, some economists might have the answer, and it’s related to ‘compensating wage differentials’. What is that? Well, it is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that the worker could perform. Now, when we look at prostitution, it covers three main costs:
- Physical Risk: The danger of violence or disease.
- Legal Risk: The probability of arrest and incarceration.
- Social Stigma: The “social death” that occurs if one is outed.
This creates a bit of a problem on the supply side. Not as many people are keen to take those risks, which means there are fewer workers available. This shift moves the supply curve to the left and causes the average wage to go up. It’s just basic economics! Another thing is that of the opportunity cost. This theory was proposed by Edlund & Korn’s ‘Theory of prostitution,’ where they proposed that prostitution isn’t just a substitution for other objects but instead is a substitution for marriage. Crazy, isn’t it?
Now, let me introduce you to the Lemons theory. In 1971, George Akerlof won a Nobel Peace prize on how asymmetric information can destroy markets. Again, what does it have to do with economics and prostitution?
In this shadow market, information asymmetry is at an all-time high because contracts cannot be forced. In case of a scam, where the worker takes the money of a client and the client turns out to be some prick, in this case, a client can’t sue a prostitute, and vice versa. Thus, it ultimately creates a trust gap. Neither the buyer nor the seller trusts the other because the buyer fears being scammed and the seller fears being harmed. This is where the intermediary comes in, acting as a middleman to bridge the information gap. As in legitimate markets, we have regulations, laws, and institutions to solve the lemons problem; in this market, we have middlemen and madams who solve the lemons problem. The middlemen, while parasitic, put in place measures to ensure that financial transactions occur efficiently, enforcing punishment (in the form of violence) on both parties as and when required.
But in this day and age, the internet has easily solved the lemons problem by effectively throwing these middlemen out of the picture. Today, websites like The Erotic Review or Tercer allow clients to write detailed reviews of workers. The result? A worker with 50 positive reviews can charge a “Peach” price (a premium price) because she has proven she is not a “Lemon.” Also, these platforms require workers to hold up a sign displaying today’s date and their face (proof of life/identity), which helps reduce information asymmetry. The client knows exactly who they are getting.
In all industries, we see costs arise outside of the production process. In this “market,” there exist various costs incurred when making an economic trade, known as transaction costs. In the sex trade, these costs are abnormally high because the market is illegal. You can’t just open a shop or buy an ad on Google, Facebook, Instagram, or maybe X, but these taxes can be broken down into three categories for this industry:
First, Search costs. It is the time and effort spent locating a suitable partner. In conventional markets, this process is straightforward; consumers enter a store and obtain the desired product. However, the sex trade presents greater complexity. Clients searching for services in red-light districts expend significant resources, such as fuel and time, while sex workers spend unpaid hours waiting to be noticed. Economists Scott Cunningham and Todd Kendall, in their paper “Prostitution 2.0,” demonstrated that the advent of the internet fundamentally transformed this dynamic. The migration of the market to platforms such as Craigslist and online review boards significantly reduced the cost of finding a partner. This shift not only increased efficiency but also enhanced safety. As internet access expanded, street-based sex work declined, and incidents of violence, including rape and murder, decreased because transactions increasingly occurred indoors rather than on the street. The internet effectively eliminated much of the market friction, allowing participants to filter by specific criteria such as eye color, height, and location, thereby improving safety and overall welfare.
Next up, we have screening costs, which refer to a strategy of combating adverse selection – one of the potential decision-making complications in cases of asymmetric information – by agents with less information. In legal markets, this is simple and cheap because you can just trust the store. But in illegal markets, it can be a matter of life and death. Levitt and Venkatesh, the economists who studied Chicago street prostitution, found that some workers gave out “freebies” to police officers to avoid getting arrested. That’s not just lost income; instead, it’s really a bribe, and it’s part of the cost of doing business. Here’s something surprising: women with middlemen actually earned more money, even after giving the middlemen a 25% cut. The reason is that the pimp handled things like HR and security, and could spot undercover cops and dangerous clients much better than the worker could alone. So the “pimp tax” was real, but it paid for peace of mind and sometimes even safety.
Now, what are enforcement costs? They are the bother and danger associated with actually receiving payment. In the underground world, if a client refuses to pay after the service, you can’t just take him to court. You have to enforce the contract yourself, and that’s when violence often comes into play. It’s the harsh reality of the illicit trade: if talking doesn’t work, people might use force or worse. Here’s where Edlund and Korn again come into the picture, who pointed out that the high price of sex work is partly an “insurance premium” against the risk of not getting paid or getting hurt. But technology changed things. Platforms like OnlyFans eliminated enforcement costs by requiring people to pay up front with a credit card before they receive anything. The platform works like an escrow agent, so the risk of not getting paid basically drops to zero.”This is a primary factor explaining why rates on digital platforms like OnlyFans are considerably lower than those for traditional, in-person services. We can also look at platforms like OnlyFans, where there is no physical interaction, and thus the nature of the service also shows how prices are determined. There’s no need for muscle when you have a Mastercard.
But is prostitution recession-proof? Is it inelastic or elastic? We have kept assuming that this sex trade is completely immune to recession, but it’s false. According to research by Moffatt and Peters (2004) on the UK market, the demand for paid sex is actually highly price-elastic (-1.6), meaning a 10% increase in price leads to a 16% drop in demand. This further shows that these clients aren’t just mindless people but instead are rational consumers who are sensitive to price. Moreover, it further exhibits cross-price elasticity due to a boom in low-cost substitutes. As economists Cunningham and Kendall note, the rise of ‘free’ dating apps like Tinder and low-risk digital interactions (OnlyFans) has broken the monopoly on intimacy. These examples also showcase one key thing: clients treat the sex trade as a luxury good, more specifically for entertainment purposes, whereas street-level work often acts as an ‘inferior good,’ fluctuating wildly with the broader economy.
At the start of my article, I had also mentioned how sex work requires zero barriers to entry. Let me contradict myself by saying it actually does. Think for a moment, if this job pays you so much and requires almost no educational requirements, why wouldn’t everyone do this job? The answer is simple: no one would ever consider doing such a job because of the mental stress these workers face from society, and the constant risk of physical harm. The stigma attracted from everyone is one of the biggest barriers for anyone who’s trying a hand at this job. Prostitution isn’t just any other shady industry; it is one of the most lucrative businesses in the world, which has been running for centuries, all while largely following the basic laws of economics. There may be questions about the morality of this work and about why they do it. Or what incentivizes them to take up this career? But that’s not really my job. As of now, it’s to educate you, the readers, on how it can be viewed through an economic lens.