economics versus politics pitfalls of policy advice abstract the standard approach to policy making and advice in economics implicitly or explicitly ignores politics and political economy and maintains that if possible any market failure should be

testing for evidence of adverse selection in the automobile insurance market a comment in 1994 puelz and snow presented empirical evidence of adverse selection in the market for automobile collision insurance using data from a private insurer they claimed to have found strong evidence of adverse selection in the insurer s portfolio their test was based on individuals choice of deductible in each risk class from the models of rothschild and stiglitz 1976 and wilson 1977 it is well known that if residual adverse selection is present in some risk classes insurers will offer menus of contracts from which insureds will self select at equilibrium higher risk individuals will choose the smaller deductible and will be charged the higher price per unit of insurance dionne doherty and fombaron 2000 an empirical test of the theory is to verify in each risk class whether lower deductibles are chosen by insureds with higher accident proba

testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

u s comparative advantage in bioenergy a heckscher ohlin ricardian approach much of the current literature on trade in biofuels is focused on the partial equilibrium welfare effects in the u s ethanol sector of potentially distorting policy instruments such as tax credits to blenders and import tariffs see elobeid and tokgoz 2006 de gorter and just 2007 however recent studies by the oecd 2006 and the world bank kojima mitchell and ward 2007 have expanded the analysis to consider the future prospects for trade in both ethanol and biodiesel paying particular attention to current production costs across countries and the connection between thresh old prices for crude oil prices and biofuel pro duction costs as well as the land requirements needed to meet the types of biofuel production mandates being implemented in the united states the european union eu and else where two key stylized facts can be gleaned from these latter studies while increasing crude oil prices have improved the economic viability of say u s corn based ethanol brazil continues to have a significant comparative advantage in producing ethanol from sugarcane oecd 2006 kojima mitchell and ward 2007 sec ond the land requirements necessary to meet targets being set for the proportion of biofu els used in transport fuel consumption show that again brazil has a clear comparative ad vantage for example brazil only requires 3 of its agricultural land to meet a 10 share of biofuels in domestic transport fuel consump tion compared to 30 36 and 72 re spectively in the united states canada and the e u oecd 2006 this all seems to point to a simple but rather predictable story of trade in biofuels in the absence of trade distorting policy instru ments brazil currently has a comparative and maybe even an absolute advantage in produc ing biofuels based on lower ethanol feedstock costs and relative abundance of agricultural land even in the presence of trade distortions brazil exported 20 of its production during the 2006 7 harvest season kojima mitchell and ward 2007 and this would increase sub stantially if the united states removed its ethanol import tariff of 54 cents per gallon elobeid and tokgoz 2006 however the mar gin for competitiveness in biofuels is rather narrow only 10 of production being traded internationally of which brazil accounts for 50 kojima mitchell and ward 2007 this is a static story though based on cur rent crop yields as well as existing biofuel production technologies consequently in try ing to analyze the potential for united states comparative advantage in biofuels production it is important to account for technological innovation that may occur within the next decade notably in the production of ethanol from cellulosic material to that end a styl ized trade model is set out in the first part of this article which allows for the possibil ity that the united states could become a fu ture exporter of biofuels the model draws on a heckscher ohlin ricardo approach origi nally due to davis 1995 as well as analysis of trade in the presence of external economies helpman and krugman 1985 given this analysis the second part of the article is con cerned with the possibility that current u s policy toward corn based ethanol production may actually stymie the potential for future exports drawing on recent literature analyz ing the infant industry argument for protec tion saure 2007

marriage divorce and asymmetric information we use data on people s valuations of options outside marriage and beliefs about spouses options the data demonstrate that in some couples one spouse would be happier and the other spouse unhappier outside of some marriages suggesting that bargaining takes place and that spouses have private information we estimate a bargaining model with interdependent utility that quantifies the resulting inefficiencies our results show that people forgo some utility in order to make their spouses better off and in doing so offset much of the inefficiency generated by their imperfect knowledge thus we find evidence of asymmetric information and interdependent utility in marriage

the basic analytics of moral hazard the basic analytics of moral hazard are developed using the simplest possible model of the insurance market even when the underlying expected utility function and the function relating the accident probability to accident prevention effort are extremely well behaved the indifference curves and feasibility set the set of insurance contracts which at least break even are not indifference curves need not be convex and feasibility sets never are priceand income consumption lines may be discontinuous and effort is not in general a monotonic or continuous function of the parameters of the insurance policies provided

selection effects in the united kingdom individual annuities market this paper explores adverse selection in the voluntary and compulsory individual annuity markets in the united kingdom two empirical regularities support standard models of adverse selection first annuitants are longer lived than non annuitants these mortality differences are more pronounced in the voluntary than in the compulsory annuity market we estimate that the amount of adverse selection in the compulsory market is about one half of that in the voluntary market second the pricing of different types of annuity products within each annuity market is consistent with individuals selecting products based in part on private information about their mortality prospects the aging of populations in many developed nations has generated substantial interest in the way households finance consumption in their retirement years annuities insurance products that provide a payment stream for as long as the insured individual is alive offer one way to spread an accumulated stock of resources over a retirement period of uncertain length theoretical research beginning with yaari 1965 suggests substantial utility gains from annuitisation in the presence of stochastic length of life public policy discussions have also generated substantial current interest in the operation of annuity markets the decline in long term interest rates in the united kingdom since the early 1990s has coincided with a decline in annuity payouts relative to annuity premia this has sparked a debate

intermediate products and the theory of international trade a generalization of the pure intermediate good case empirical studies of neoclassical factorproportions trade theory have long recognized that hypotheses concerning relative factor intensity must be defined in terms of gross factor intensities accounting for intensities of intermediate products rather than simply in net factor intensity terms i e at the last stage of production only nevertheless development of the pure theory of international trade has generally neglected intermediate products the justification for this convenience has in part been based on a study by jaroslav vanek which demonstrated that the introduction of interindustry flows in a two good model did not affect the traditional theorems rybczynski stolper samuelson or heckscher ohlin defined in net factor intensity terms however in a recent study raveendra batra and francisco casas demonstrated that the introduction of a pure intermediate commodity one that is produced solely for use in the production of final goods complicates the issue considerably thev show in fact that most of the traditional trade theorems defined in net terms may not hold without additional provisions if such intermediate products are introduced in the model p 297 the basic difference between the batra casas model with pure intermediate products and vanek s interindustry flow model is the possibility of a conflict between the net and gross factor intensity ranking of final products 2 the conditions which batra and casas demonstrate are necessary in order to ensure a uniform ranking of final commodities according to net and gross factor intensitv were derived under the explicit assumption that the intermediate good is totally supplied from domestic production the purpose of the present paper is to generalize the batracasas model to allow the intermediate good to be imported in some proportion 3 the analytical approach of the present paper is quite different from that taken by batra and casas however here the problem is treated as a problem of ex post factor intensity measurement although the underlying model and necessary conditions to ensure its proper functioning are implicitly the same as described by batra and casas in section i a measure of gross factor intensity appropriate in an economy importing intermediate inputs is developed in the following section this measure is applied to the batra casas model under alternative assumptions regarding the supply source of the intermediate good it is shown that if some proportion of the intermediate good is imported then net and gross factor intensity rankings can be assured to be uniform if and only if in addition to the

evaluation of the subjective probabilities of survival in the health and retirement study in the health and retirement study respondents were asked about the chances they would live to 75 or to 85 we analyze these responses to determine if they behave like probabilities of survival if their averages are close to average probabilities in the population and if they have correlations with other variables that are similar to correlations with actual mortality outcomes we find that generally they do behave like probabilities and that they do aggregate to population probabilities most remarkable however is that they covary with other variables in the same way actual outcomes vary with the variables for example respondents with higher socioeconomic status give higher probabilities of survival whereas respondents who smoke give lower probabilities we conclude that these measures of subjective probabilities have great potential use in models of intertemporal decision making under uncertainty

the efficiency of competitive equilibria in insurance markets with asymmetric information abstract this paper addresses the relationship between competitive equilibria and efficient allocations in an insurance market with asymmetric information using the definition of second best efficiency proposed by harris and townsend 1981 for environments characterized by informational assmmetry the efficiency properties of several proposed market equilibria are examined we find an analogue to the first optimality theorem a miyazaki wilson equilibrium always results in a second best allocation

the political economy of stabilization commitment capacity and public response abstract political pressures are generally recognized as important in determining success or failure of economic stabilization and adjustment programs but there has been little comparative analysis of the politics of stabilization this study examines the factors affecting i political leaders commitment to stabilization measures often called political will ii governmental ability to implement stabilization measures and iii the responses of key interest groups and the public at large to those measures the study also discusses political implications of the design of programs and the attempted speed of stabilization and sketches the tactics available to governments to manage political risk including partial compensation persuasion diversion or obfuscation and containment of protest the discussion is based on case studies of stabilization efforts in five fairly poor small highly trade dependent countries ghana in the late 1960s and early 1970s and zambia kenya sri lanka and jamaica in the late 1970s and early 1980s a subsidiary theme within the broader discussion is the ways in which the political economy of stabilization may differ in such countries as compared to larger semi industrialized economies

expectations life expectancy and economic behavior this study analyzes responses to a questionnaire designed to elicit subjective expectations and probabilities of survival people do extrapolate past improvements in longevity when they determine their subjective horizons and they are fully aware of levels of and movements within todays life tables the subjective distribution has greater variance than its actuarial counterpart and the subjective variance decreases with age the implications of these findings for optimal social security for the construction of annuities for the analysis of savings behavior and for evaluating lifetime earnings are discussed the data were collected in the united states from a sample of 411 white male economists and a sample of 363 white males in a midwestern smsa excerpt

the political economy of expenditures by the peruvian social fund foncodes 1991 95 the peruvian social fund foncodes was created by president alberto fujimori in 1991 with the stated objectives of generating employment alleviating poverty and improving access to social services this article uses province level data on monthly expenditures socioeconomic indicators and electoral outcomes to analyze political influences on the timing and geographic distribution of foncodes expenditures between 1991 and 1995 i reach three main conclusions first these expenditures increased significantly before national elections second foncodes projects were directed at provinces in which the marginal political effect of expenditures was likely to be largest third these projects favored the poorest provinces which suggests that the program also had a redistributive function the results are robust to a large number of specifications and controls the peruvian data support predictions made in the literature on political business cycles as well as the literature on political influences on the allocation of discretionary funds

redistribution by insurance market regulation analyzing a ban on gender based retirement annuities we illustrate how equilibrium screening models can be used to evaluate the economic consequences of insurance market regulation we calibrate and solve a model of the united kingdom s compulsory annuity market and examine the impact of gender based pricing restrictions we find that the endogenous adjustment of annuity contract menus in response to such restrictions can undo up to half of the redistribution from men to women that would occur with exogenous social security like annuity contracts our findings indicate the importance of endogenous contract responses and illustrate the feasibility of employing theoretical insurance market equilibrium models for quantitative policy analysis

capital and opposition in africa coalition building in multiethnic societies under what conditions can opposition politicians with ethnic constituencies form electoral coalitions in africa s patronage based political systems incumbents form coalitions by using state resources to secure the endorsement of politicians from other ethnic groups opposition politicians however must rely on private resources to do the same this article presents a political economy theory to explain how the relative autonomy of business from state controlled capital influences the formation of multiethnic opposition coalitions it shows that the opposition is unlikely to coalesce across ethnic cleavages where incumbents use their influence over banking and credit to command the political allegiance of business the largest potential funder of opposition in poor countries liberalizing financial reforms in freeing business to diversify political contributions without fear of reprisal enable opposition politicians to access the resources needed to mimic the incumbent s pecuniary coalition building strategy a binomial logistic regression analysis of executive elections held across africa between 1990 and 2005 corroborates the theoretical claim greater financial autonomy for business as proxied by the number of commercial banks and the provision of credit to the private sector significantly increases the likelihood of multiethnic opposition coalitions being formed

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

removing distortions in the u s ethanol market what does it imply for the united states and brazil we analyze the impact of trade liberalization and removal of the federal tax credit in the united states on ethanol markets using a multimarket international ethanol model we find that u s trade barriers have been effective in protecting the ethanol industry under current policy there is separability of the u s ethanol market from world markets with trade liberalization the ethanol market deepens making it less susceptible to price volatility the effect of trade liberalization extends beyond ethanol markets affecting agricultural markets the results show that the impact of removal of the tax credit overrides the impact of the tariff removal copyright 2008 oxford university press

can higher prices stimulate product use evidence from a field experiment in zambia the controversy over how much to charge for health products in the developing world rests in part on whether higher prices can increase use either by targeting distribution to high use households a screening effect or by stimulating use psychologically through a sunk cost effect we develop a methodology for separating these two effects we implement the methodology in a field experiment in zambia using door to door marketing of a home water purification solution we find evidence of economically important screening effects by contrast we find no consistent evidence of sunk cost effects jel c93 d12 i11 m31 o12

the structural adjustment of politics in africa abstract it has long been recognized that the structural adjustment programs currently being proposed by the world bank and the international monetary fund in africa have important political consequences however there has been almost no attention devoted to what structural adjustment if implemented means for the way that politics is actually carried out in african nations the failure to examine the long term consequences of economic reform for politics is particularly surprising given that the major instruments of structural adjustment public sector reform devaluation elimination of marketing boards threaten to change not only the constituencies that african leaders look to for support but the way in which leaders relate to their supporters in the countries south of the sahara the paper examines how structural adjustment if actually implemented would affect politics in african countries the paper finds that structural adjustment makes the political climate much riskier for leaders while weakening the central apparatus of the state on which rulers have long relied to stay in power the implications of the analysis for donors are also discussed

advantageous selection in insurance markets this article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision risk tolerant individuals take few precautions and are disinclined to insure but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer more risk averse types taxing insurance drives out the reckless clients allowing a strict pareto gain this result depends on administrative costs in processing claims and issuing policies as does the novel finding of a pure strategy partial pooling subgame perfect nash equilibrium in the insurance market copyright 2001 by the rand corporation

asymmetric information in insurance general testable implications several recent articles on empirical contract theory and insurance have tested for a positive correlation between coverage and ex post risk as predicted by standard models of pure adverse selection or pure moral hazard we show here that the positive correlationproperty can be extended to general setups competitive insurance markets and cases where risk aversion is public we test our results on a french dataset our tests confirm that the estimated correlation is positive they also suggest the presence of market power

separating moral hazard from adverse selection and learning in automobile insurance longitudinal evidence from france the identification of information problems in different markets is a challenging issue in the economic literature this paper performs tests of residual asymmetric information in the french automobile insurance market for the 1995 1997 period this market is characterized by the presence of a regulated experiencerating scheme bonus malus contract choices are strongly associated with the bonus malus of policyholders we have access to longitudinal survey data with dynamic information both on claims and accidents we propose a causality test to distinguish pathways through which a positive correlation arises between contract choice and accidents we find evidence of moral hazard among a sub group of policyholders with significant driving experience 5 15 years we distinguish this moral hazard estimate from adverse selection and learning policyholders with less experience have a combination of learning and moral hazard whereas no residual information problem is found for policyholders with more than 15 years of experience

evidence on adverse selection equilibrium signaling and cross subsidization in the insurance market the configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium deductible menu and the demand function as a standard hedonic system using contractual data from a representative insurer we estimate a reduced form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage the data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

is bioenergy trade good for the environment we analyze the impacts of bioenergy trade on greenhouse gas emissions using a two good three factor model bioenergy is an agricultural good used as a substitute for fossil fuels in industry governments tax domestic pollution without international coordination we assume that northern countries have higher labor productivity than southern ones and that agriculture is less pollution intensive than industry after taxation we show that whereas southern countries impose a lower tax rate than northern ones they do not necessary have a competitive advantage in industry and that compared to autarky trade liberalization either increases or decreases worldwide emissions depending on regional comparative advantages

structural adjustment as a policy process the case of tanzania abstract analyses of structural adjustment in developing countries have increasingly come to emphasize the importance of grounding reforms in the political realities of the countries concerned while this approach is a step forward from the more economistic and prescriptive analyses that prevailed in the first part of the 1980s we believe that the dynamics of structural adjustment is only fully captured by an approach that treats the policy context as an explicit and independent variable on the basis of a case study of tanzania this article uses a policy process approach in which the notions of ambiguity and conflict in policy situations help us better understand the opportunities and constraints for action on structural adjustment issues

economic reform and political transition in africa the quest for a politics of development the 1980s were bracketed by crises in africa as protracted economic malaise was succeeded by a wave of political reform analysts have sought to understand the sources of economic decline as well as the political requisites for recovery in the region neoclassical and structuralist analyses have been challenged by state centric views of economic change the latter perspective emphasizes the need for capable developmental states as a basis for long term adjustment but a political theory of economic change is still lacking such a theory must address the institutional foundations of growth as well as the shifting basis of social coalitions in african regimes political liberalization suggests the possibility of a new setting for economic reform though the effects of political reform on institutions and coalitions remain ambiguous and democratization cannot be regarded as a panacea for the region s developmental failure future research must look more closely at the interests and structures in transitional regimes and scholars should adopt a more comparative vantage on africa s challenges of reform

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

trade spatial separation and the environment we develop a simple two sector dynamic model to show how pollution can provide a motive for trade by spatially separating incompatible industries we assume that the production of smokestack manufactures generates pollution which lowers the prod uctivity of an environmentally sensitive sector farming two identical unregulated countries will gain from trade if the share of world income spent on smokestack goods is high in contrast when the share of world income spent on the dirty good is low trade can usher in a negatively reinforcing process of environmental degradation and real income loss for the exporter of smokestack goods 1999 elsevier science b v all rights reserved

optimal mandates and the welfare cost of asymmetric information evidence from the u k annuity market much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected once detected however there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs to do so we develop a model of annuity contract choice and estimate it using data from the u k annuity market the model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options we focus on the choice of length of guarantee among individuals who are required to buy annuities the results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about 127 million per year or about 2 percent of annuitized wealth we also find that by requiring that individuals choose the longest guarantee period allowed mandates could achieve the first best allocation however we estimate that other mandated guarantee lengths would have detrimental effects on welfare since determining the optimal mandate is empirically difficult our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest

a simple theory of economic growth these migration experiments prove not that all labor forces are equally skilled but that these shortcomings of skill and so on in countries with poor educational systems are not even close to being sufficient to explain the gigantic differences in per capita income with richer countries i believe that the larger part of the story is the quality of the arrangements that the rich countries adopt poor countries are typically misgoverned or are anarchies with no government at all which is even worse m olson

rent seeking political influence and inequality a simple analytical example a simple model allowing an analysis of the interaction between economic policy decisions and rent seeking by private agents competing for political influence is developed rent seeking may be of the directly unproductive type requiring resources that are withdrawn from productive activities or it may manifest itself as income transfers corruption to political decisionmakers

the interaction of public and private insurance medicaid and the long term care insurance market a long tradition in public finance examines how public programs can crowd out private activ ity in areas as diverse as education savings and insurance among others these studies typi cally focus on aggregate economic implications particularly for government expenditures and national savings in this paper we demonstrate that crowd out can also have an important effect on individual welfare specifically we show that the provision of even very incomplete public insurance can crowd out more comprehensive private policies by imposing a large implicit tax on private insurance benefits thus potentially increasing overall risk exposure for individuals we examine the interaction of public and private insurance for one of the largest uninsured financial risks facing the elderly in the united states long term care expenditures at 135 bil lion in 2004 long term care expenditures represented over 8 5 percent of total health expendi tures or all ages or roughly 1 2 percent of gdp moreover real long term care expenditures are projected to triple over the next 35 years due to rising medical costs and the aging of the baby boomers only 10 percent of the elderly however have any private long term care insurance and one third of expenditures are paid for out of pocket congressional budget office cbo 1999 cbo 2004 brown and finkelstein 2007 one potential explanation for the small size of the private market is that the public insurance provided by medicaid may crowd out demand for private insurance medicaid was designed to provide long term care insurance for the poor elderly mark v pauly 1989 1990 has established the qualitative result that as an incomplete but publicly funded source of long term care insur ance medicaid has the potential to reduce substantially demand for private long term care insur ance even among the nonpoor our work builds on this insight by quantifying the magnitude of medicaid s crowd out effect and the incomplete nature of medicaid coverage we also illustrate the mechanism behind medicaid s crowd out effect and are therefore able to assess the likely impact of alternative policies on private insurance demand we develop a utility based model of a 65 year old risk averse individual who chooses an opti mal intertemporal consumption path in the presence of uncertainty about long term care expen ditures we calibrate the model using data on the distribution of long term care expenditure risk common state medicaid rules and the prices and coverage of typical private long term care insurance policies

dynamic inefficiencies in insurance markets evidence from long term care insurance we examine whether unregulated private insurance markets efficiently provide insurance against reclassification risk the risk of becoming a bad risk and facing higher premiums to do so we examine the ex post risk type of individuals who drop their long term care insurance contracts relative to those who are continually insured consistent with dynamic inefficiencies we find that individuals who drop coverage are of lower risk ex post than individuals who were otherwise equivalent at the time of purchase but who do not drop out of their contracts these findings suggest that dynamic market failures in private insurance markets can preclude the efficient provision of insurance against reclassification risk this abstract was borrowed from another version of this item

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

competitive insurance markets with two unobservables i study a screening game in a competitive insurance market in which insurance customers differ with respect to both accident probability and degree of risk aversion it is shown that indifference curves of customers may cross twice thus the single crossing property does not hold when differences in risk aversion are sufficiently large firms cannot use policy deductibles to screen high risk customers types may be pooled in equilibrium or are separated by raising premiums above actuarially fair levels this leads to excessive entry of firms in equilibrium