| 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. |