A Dynamic Model with Import Quota Constraints
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Author(s)
Basak, Suleyman
Pavlova, Anna
Date Issued
July 9, 2004
Series/Report no.
MIT Sloan School of Management Working Paper;4230-02
Abstract
The analysis of import quotas is predominantly based on a static model, which is unable to capture the fact that a
quota is imposed over a period of time. This article develops a continuous-time model that incorporates a more
realistic dynamic quota constraint into the workhorse model and argues many traditional results to no longer be
valid. In particular, a country may choose to refrain from trade in a quota-protected commodity even when its
world price is below the domestic price and the quota is not fully exhausted. Distinct economic behavior prevails
depending on whether the country is importing the protected good, exporting it or refraining from trade in it. The
domestic price of the protected good exceeds the world price in import and no-trade regions, even when the quota
is underutilized in contrast, the workhorse quota model predicts no economic effects of a quota unless it is binding.
Additional factors underlying the quota-protected economy, the quota utilization rate to date and the time remaining
till the quota horizon, are identified. Various extensions of the baseline analysis support the robustness of our main
conclusions
Subjects
Quota
International Economics and Finance
Asset Pricing
Integral Constraints
Persistent DSpace Link
