by on March 10, 2008 at 10:32 pm in Economics | Permalink

It’s not so hard to explain:

The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined.  Increased price is shown to be a means of assuring contractual performance.  A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted stream of rents on future sales which is greater than the wealth increase from nonperformance.  This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets.  Advertising investments therefore becomes a positive indicator of likely performance.

That’s Klein and Leffler, JPE, 1981, who shy away from making the prurient explicit.  This is one easy way to get a demand curve sloping upwards, namely you only trust the person if she is receiving lots of money.  But what’s the point of preventing shirking if you’re going to be self-incriminating?

1 Robert March 10, 2008 at 11:10 pm

“Assuring contractual performance” … yes but what “performance” are we measuring? Sex is sex and its mechanics are basic and primal so “better sex” is not a sufficiently differentiating factor- sex for 50 bucks or 4000 is basically the same. Dicscretion? If he was paying for discretion he was deluded because in fact the way he went about this certainly put him more at risk than if he had checked into a motel six at the outskirts of albany under a disguise and payed $100.

In the end I think it was $4,300 because he could afford it and the opportunity was there, somehow (did someone introduce him to the service?) –

but more importantly it was a seedy episode and he was paying to somehow purge it of its seediness. The more he payed the more acceptable it would seem to him -the further removed from its seediness – it was the price he was paying to his conscience – and he probably would have been ready to pay a lot more too.

2 jason voorhees March 11, 2008 at 12:04 am

Come on Robert. Sex isn’t just sex. You’re buying sex with a more beautiful woman (in some holistic sense) the more diamonds that exist beside her name. He’s not buying sex. He’s buying sex and memories of sex with a beautiful woman, of which there is a scarcity. Given the marital tradeoffs commercial sex workers must make, and given the relatively better chances that extremely beautiful women have on the marriage market, you’d of course expect the price of the most beautiful women to be very high. If you read through the smoking gun, one girl notes that the 500 pounds she’d been quoted as saying, “but to provide sex for 500 [pounds] … is not a price I would ever consider doing it for.”

3 john March 11, 2008 at 9:43 am

So what you’re explaining is an oversupply of prostitutes. But this only makes me wonder where you’re hanging out, or what exactly is going on at the George Mason University campus…

4 Bob Murphy March 11, 2008 at 10:54 am

Are we sure that it was really $4300 for a single rendezvous? I confess I haven’t read the news stories too carefully, but it seems that he was paying for a lot more than just getting the woman’s consent. Not only that, it seems it might have been an account, i.e. he was building up his balance for future encounters.

5 jason voorhees March 11, 2008 at 1:12 pm

Bob – This particular prostitute had a price in the 4000-5000 dollar range. The prostitutes on the website (look up the Smoking Gun affidavit for pictures of the women and their prices) were all high prices. One prostitute was tens of thousands of dollars, but I can’t remember the rate – if it was by the hour or by the day. Either way, though, it was expensive.

He did build up an account, though. It’s said that he had $400 in his account, more or less. Not clear how the account system worked, although the crimes they’re considering charging him with had to do with particular ways that cash payments are made to avoid detection, so maybe he built up credit in some way to avoid detection, though I’m speculating. I’ve never heard of brothels keeping a tab open like that, let alone someone overpaying and having credit. Maybe he was dissatisfied with his previous encounters and got a deduction for subsequent visits? For instance, he apparently enjoyed unprotected intercourse with the prostitutes, which you’d think would have a compensating differential price, but maybe he paid for one and when the event happened, couldn’t get that kind of intercourse and so had a credit.

6 FXKLM March 11, 2008 at 9:42 pm

jason voorhees: A 500 pound prostitute? No thanks.

7 Anonymous March 14, 2008 at 10:59 am

Now we learn that Spitzer got in trouble because he paid too little (from Sudhir Venkatesh, most recently featured in MR for his Gang Leader for a Day book). He divides high-end “indoor” prostitutes into three tiers, of which Spitzer’s girl would be in the lowest tier.

Given that the Duke of Westminster was allegedly “Client 6”, and he’s the 46th richest guy in the world and the richest man in England, you have to wonder who patronizes the highest of Venkatesh’s three tiers.

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