Master Thesis VU / UvA: Entrepreneurship The Economic Externalities of Prostitution: The case of the Amsterdam Red Light District Joris Z. van den Berg* Supervised by: Rafael P. Ribas Date of Review: July 1, 2016 Abstract Since the late twentieth century, prostitution in Red Light Districts (RLDs) has become increasingly intertwined with the tourist and entertainment industry. Besides perceived negative social implications, one may argue that RLDs create viable economic opportunities. However, there are not many studies that quantify the effect of a RLD on the local economy. With the use of a density discontinuity design, this thesis shows that the Amsterdam RLD is an economic hotspot that attracts businesses and employment. Moreover, with recent policies intended to reduce its size, in particular the implementation of Project 1012, which closed 27% of prostitution windows, the attractiveness towards businesses and employment has increased in the RLD area. Especially, around closed prostitution windows business and employee density seems to increase. Therefore, although Amsterdam’s RLDs are located right in economic hotspots, reducing prostitution in the area has created business opportunities and employment. This is, however, not to say that governments should completely ban prostitution as this may decrease its attractiveness to tourists. Moreover, as prostitutes often relocate to other areas economic gains in the RLD may be offset by economic losses elsewhere. * Student ID: jbg227 (VU) | 1009280 (UvA) 2 Foreword My entire student life took place in Amsterdam. I have always been fascinated by the city and did not want to leave university without having researched it once to some degree. When the opportunity passed by to research the Amsterdam Red Light District in a way that is relevant and able to contribute to theory and practice, I immediately got excited. The Amsterdam Red Light District has always fascinated me. I find it very intriguing that on the one hand, prostitution is increasingly scrutinized and is often related to crime, drugs and other negative social impacts. While on the other hand, the Red Light District may be one of Amsterdam’s best selling points towards tourists, which in turn fuels the economy. To get more grip on organized crime and increase the attractiveness of the area, the municipality implemented Project 1012, which aims to decrease the Red Light District with almost 50 percent. However, only a few researchers have looked at what implications the shrinking of the Red Light District has on social and economic issues. Especially economic externalities have been neglected in academic literature. I am very fulfilled that with this thesis I shed more light on this issue and contribute the development of this research domain. Writing this thesis has been a very interesting and challenging job. I have learned a great new deal about the city, its RLD but also on how to conduct a well-structured quantitative research. In the end, I am very satisfied with the end product. Next to my own efforts, several other people have aided me in the process. To these people I would like to show my gratitude. Firstly, I want to thank Rafael, my thesis supervisor, for the possibility of doing this research and for his guidance throughout the process. Secondly, I want to thank Ivo, from the municipality of Amsterdam that was willing to provide the necessary data to execute this study. Hopefully you will read this thesis with the same amount of joy as I had writing it. For any comments or questions on this thesis you can contact me at [email protected]. Sincerely, Joris Z. van den Berg 3 Table of contents Foreword ..................................................................................................................................................... 3 Introduction ................................................................................................................................................. 6 1 Literature Review .............................................................................................................................. 8 1.1 The economics of prostitution ..................................................................................................... 8 Links with the illegal economy ......................................................................................... 9 Links with the legal economy ......................................................................................... 10 1.2 Laws and regulations ................................................................................................................. 12 1.3 The case of Amsterdam ............................................................................................................. 14 1.3.1 Description of RLDs ........................................................................................................ 14 1.3.2 Development of De Wallen ............................................................................................. 16 Emergence of De Wallen ................................................................................................ 16 The rise of sex tourism .................................................................................................... 17 Closing down De Wallen ................................................................................................ 18 2 Data .................................................................................................................................................... 20 2.1 Data collection ........................................................................................................................... 20 2.2 Variables .................................................................................................................................... 21 2.3 Descriptive statistics .................................................................................................................. 22 3 Empirical Method ............................................................................................................................. 24 3.1 Kernel density estimation .......................................................................................................... 24 3.2 Multivariate (2D) kernel density estimation ............................................................................. 26 3.3 McCrary Test ............................................................................................................................. 27 4 Results ................................................................................................................................................ 31 4.1 RLD effect on Businesses ......................................................................................................... 31 4.1.1 Density Maps ................................................................................................................... 31 Cross-sectional implications ........................................................................................... 33 Changes over time: Inside the RLD ................................................................................ 33 Changes over time: Difference between inside and outside RLD / NAT ....................... 34 4.1.2 McCrary Test ................................................................................................................... 35 McCrary test 1: RLD vs Inside NAT + Outside NAT .................................................... 35 McCrary test 2: RLD vs Outside NAT ........................................................................... 38 McCrary test 3: Inside NAT (ex RLD) vs Outside NAT ................................................ 40 McCrary test combined: The isolated RLD effect on business density .......................... 42 4 4.2 RLD effect on Employees ......................................................................................................... 43 4.2.1 Density Maps ................................................................................................................... 43 Cross-sectional implications ........................................................................................... 45 Changes over time: Inside the RLD ................................................................................ 46 Changes over time: Difference between inside and outside RLD / NAT ....................... 46 4.2.2 McCrary Test ................................................................................................................... 47 McCrary test 1: RLD vs Inside NAT + Outside NAT .................................................... 47 McCrary test 2: RLD vs Outside NAT ........................................................................... 50 McCrary test 3: Inside NAT (ex RLD) vs Outside NAT ................................................ 52 McCrary test combined: The isolated RLD effect .......................................................... 54 5 Discussion .......................................................................................................................................... 55 Practical implications ...................................................................................................... 56 Theoretical implications and limitations ......................................................................... 57 Directions for future research .........................................................................................