Abstract and Keywords
Seller reputation can incentivize the fulfillment of contractual obligations and the provision of noncontractible services if buyers have lower willingness to pay for products offered by sellers with poor reputations. For this reason, reputational mechanisms can substitute for court enforcement of contracts, when court enforcement is costly or unavailable, and more generally can improve sellers’ behavior toward buyers. This Chapter examines the market for professional escorts, a high-quality segment of the market for prostitution. Since prostitution is illegal in most US locations, court enforcement of contracts between buyers and sellers is problematic. We examine how the diffusion of websites that allow escort customers to share information with each other has created an important reputational mechanism where only weak measures of reputation were previously available. We show that the diffusion of one well-known website appears to correlate with a trend toward better escort behavior toward buyers. Welfare implications of this reputational mechanism are, however, ambiguous, since it likely expands the market for prostitution, potentially generating negative externalities.
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