Sex in the City: The Capitalization of Regulated Prostitution into Housing Prices

Abstract

We estimate the capitalization of regulated prostitution taking place in residential apartments into the rental prices of nearby dwellings. We use unique geo-localized administrative information regarding sex workers in the city of Lugano (Switzerland), which experienced a sudden and unintended increase of prostitution in residential apartments after a state-wide policy that closed brothels located in the city's outskirts. We find that apartment rents drop by 1.7% for each prostitute working within 50 meters.  This effect appears to be driven by a reduction in demand near locations with sex workers, leading to longer posting durations for affected properties. We conclude by providing policy suggestions about the optimal spatial concentration of sex-workers.

Keywords: Regulated prostitution, Real estate, Externality

JEL Classification: G41; R21