find ways of providing compensation for lowered earnings while actively educating clients about the dangers of not using condoms. However, as the client population becomes aware and concerned about the risks of contracting AIDS and thus more receptive to using condoms, this compensating differential should wither away and may even become positive.

Despite the importance of the topic, the literature on the economics of prostitution is sparse. Ahlburg and Jensen (1998) in a recent summary of the literature on the commercial sex industry and its implications for HIV/AIDS prevention policies, show that there is a total absence of econometric work. The primary reason for this is the extreme difficulty in gathering reliable data on sex workers since the profession is practiced either illegally or, as in the case of Calcutta - the focus of our paper - on the fringes of legality. While there is a lack of work by economists on sex work, there is a large and growing economics literature on the AIDS epidemic more generally, which has dealt with it from different angles. Some studies have attempted to estimate the macroeconomic impact of the epidemic finding that it is likely to be small (Over 1992), while others have attempted to look broadly at what rational choice analysis can say about the progression of the epidemic (Philipson and Posner, 1995). Kremer (1996) in a theoretical paper examines AIDS transmission in a dynamic model and shows that the prevalence of AIDS would lead people with low levels of sexual activity to be less active. On the other hand it may lead high activity people to become "fatalistic" and thus either reduce their activity only slightly or even increase it. In a mixed population with high and low activity people this creates a positive feedback, by reducing the number of available partners - resulting in higher risks of infection for high activity people and low levels of risk for low activity people.

The micro-econometric literature on AIDS has tended to suggest that epidemiological models of the epidemic may overestimate the speed of its transmission. Ahituv, Hotz and Philipson (1996), for instance, show that condom use increased among individuals in the United States in a manner consistent with the progression of the epidemic - supporting the idea that the epidemic may be self-limiting. In a study of gay men in San Francisco, Dow and Philipson (1996), demonstrate that mating is infection dependent in that infected men are twice as likely as non-infected men to have infected partners which would also tend to slow down the progression of the disease. The econometric literature on AIDS in the developing world is limited and has tended to focus more on assessing its impact rather than on testing behavioral models (World Bank, 1997).

In this paper we use a unique data set of a random sample of commercial sex workers in Calcutta, India surveyed in 1993. They were the focus of a program promoting the health of sex workers and safe sex practices that was initiated in 1992 by the All India Institute of Hygiene and Public Health in collaboration with various other organizations. We exploit the random nature of selection into this 4