There are plenty of hardworking people who have to travel a lot on government business/contracting and the per diems are far from luxurious. For example, Manhattan allowances through August 2011 are less than $215.

The system is structured on region-based limits like this because it is simple and efficient. Sure, the rare low rate for a luxury hotel pops up and somebody charges more than they would have for a "standard" property which is presumably cheaper, but this is the exception and not the rule.