Prostitution, Economics Of

To most people, prostitution would seem to have obvious economic dimensions in that it involves the exchange of money for the sale of one's body to another. There is a great diversity of statutory provisions on the subject. There is also discretion in how these are enforced in different places at different times.

The simplest application of economics to prostitution is to look at the determination of prices for the sex sold via the usage of supply-and-demand analysis. The existence of supply-and-demand schedules requires the presence of perfect competition on both sides of the market for sex. Any person could offer himself as a sexual commodity trader, hence the supply could potentially be the population of the world. Some individuals will be specialized traders in sex services, while others may use it as a part-time career to fund other things.

Likewise, on the demand side, the world population constitutes potential clients for purchasing sexual acts. Some persons will be regular purchasers of paid sex, while others only enter the market at times of shortage in their normal source of supply or for other reasons (for example, to avoid commitment entanglements in conventional relationships).

It is obvious from casual empiricism that a large proportion of the world's population does not engage in paid sex. Perhaps this is due to the tendency in most developed economies to have some degree of illegality, or at least heavy regulation in this arena. Exploring that tendency takes us back to the issue of pricing. Economists model prostitutes and their clients as rational (subjective expected) utility maximizers in a situation of risk. These decision makers will have reservation prices (or wages, in the prostitutes' case) based on feelings of guilt, risks of being caught, perceived social stigmas, and so on. Individuals only enter the demand side of the market when the price falls below their reservation price, and suppliers only enter when the offered wage exceeds their reservation wage.

The most prominent recent contribution by economists on this subject, Lena Edlund and Evelyn Korn's study, A Theory of Prostitution (2002), emphasized the role of stigma in determining prostitutes' wages. They argue that the stigma of prostitution leads to wage premiums to compensate for loss of value in the marriage market; nevertheless, there has been no systematic empirical evidence on such claims.

The existing empirical work on the economics of prostitution focuses on the supply-side determination of prices via comparative attractiveness, or on the demand-side influence of opportunity and risk variables. There has yet to be any direct measurement of the impact of size of punishment and the risks of punishment (as in general econometric studies of crime) on the supply or demand for prostitution. However, the estimates of Samuel Cameron and Alan Collins, using a U.K. national sex survey, revealed several statistically significant risk factors, such as fear of sexually transmitted diseases (in this case HIV-AIDS) and general personal risk-taking disposition.

Risk factors are central to the economic analysis of policy toward prostitution because the (theoretical) deterrent effect of punishment relies on individuals being sensitive to risks. The economic analysis of law treats the regulation of any activity as if it were designed to maximize social welfare based on a comparison of the marginal costs and benefits of enforcement. For prostitution, there are several costs and benefits that are either directly economic or that could be subject to an economic valuation via some kind of imputed prices. The most obvious costs are disease related, with the specter of HIV-AIDS transmission now overshadowing the former concern with traditional STDs. Perhaps further costs arise due to disruption of family life from prostitution by partners or use of prostitutes by partners.

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