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A Dynamic Model with Import Quota Constraints

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  • Basak, Suleyman
  • Pavlova, Anna

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

Suggested Citation

  • Basak, Suleyman & Pavlova, Anna, 2004. "A Dynamic Model with Import Quota Constraints," Working papers 4230-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    • Handle: RePEc:mit:sloanp:5419
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    File URL: http://hdl.handle.net/1721.1/5419
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    More about this item

    Keywords

    Quota; International Economics and Finance; Asset Pricing; Integral Constraints;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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