Repugnance, and regulation of new markets: surrogate wombs

One of the reasons that people are reluctant to consider legalizing markets for new and possibly repugnant transactions is that it is easy to imagine that bad things can happen in new markets. (Credit default swaps, anyone?). The question of whether it should be legal to buy and sell kidneys for transplantation is the example I've most frequently written about.

But now comes a story about the market for surrogate wombs. A company that did the matchmaking between infertile couples and surrogate moms, and had the couples set up escrow accounts to make guaranteed payments to the surrogate mom over the course of the pregnancy, has collapsed, and the funds with which it was entrusted have disappeared. Here's the story in Slate: If you stop paying a surrogate mother, what happens to the fetus?

"That's the scenario unfolding in California. The victims are couples and surrogates who met through SurroGenesis, a company "dedicated to assisting infertile couples to have a baby through third-party assisted reproduction." Hiring a surrogate through the company is expensive, as you'll see from its long list of fees. But don't worry: The company offers to "arrange for opening of [a] trust account" that will cover your expenses. Specifically, according to the Los Angeles Times, its clients say "SurroGenesis recommended that prospective parents set up trust funds administered by the Michael Charles group," its partner company.
The parents handed over the money. From this, the companies were supposed to pay the surrogates. Now, the Times reports, payments have stopped. In fact, the New York Times adds, "SurroGenesis told clients on March 13 via e-mail that their money was gone. Lawyers say that as much as $2 million may be missing, with some couples losing as much as $90,000."
...
"Surrogates aren't mercenaries. But they do need to be paid for their sacrifices. With every week that passes, they endure more of pregnancy's burdens. They submit to exams, tests, and other procedures. They take on serious medical risks. They forgo activities that might harm the fetus. They lose the ability to commute to and work at other jobs. They have bills to pay. At least one abandoned surrogate says she has received an eviction notice.
"If you stop paying your surrogate, she needs to quit and find another job, just like any other worker. But surrogacy isn't like any other job. The only way to quit a pregnancy is to abort it."

So, we've got a very bad market failure here. Either surrogacy needs to be better regulated, or private institutions have to emerge that will provide more security for these difficult transactions.

Is this kind of failure a reason to make surrogacy illegal? I think that would be way premature; I'm guessing there are happy children being brought up in loving families, borne by surrogates who feel well compensated. But it does mean that, when we debate whether to legalize selling kidneys, for example, the "market design" questions of how any such market might be regulated, and whether the worst failures could reliably be avoided, should be at the center of the discussion.

HT (and congratulations) to Steve Leider (who just took a job at Michigan)