The External Cost of Prostitution: Evidence from Downsizing Red Light Districts in the Netherlands

We measure the externalities of prostitution by quantifying the discount that households require to live next to a brothel. In our tests, we exploit a unique feature of Amsterdam’s Red Light District (RLD), where private homes are next to prostitution windows and inside a perimeter naturally delimited by canals. Using a two-dimensional difference-in-discontinuity (DiD) estimator, we find that households pay as less as 24% on homes inside the RLD. We also find that this discount disappears once prostitution windows are forcibly closed by local authorities. Notably, by incorporating the exact coordinates of brothel closings, our empirical design allows us to establish a direct link between these closings and changes in price discontinuities. To estimate the economic impact on households out of the RLD, we also exploit the closing of all brothels in Utrecht (the fourth largest city in the Netherlands) in 2013. Households are found to paid up to 12% of their home value to be far from prostitution. In both cities, the contraction of the paid-sex industry is also associated with a drastic reduction in crime rates. Overall, our findings suggest that prostitution does far more harm than good for residents due to the nuisances that it creates.