Voluntary Trade Restraints and Economic Welfare
The purpose of this paper is to examine the welfare implications of voluntary trade restraints in the context of duopoly with product differentiation. It is shown that, irrespective of whether firms compete in quantities or prices, a voluntary export restraint (VER) set at the free trade equilibrium level of foreign exports lowers domestic welfare if and only if it induces the foreign firm to comply voluntarily with the VER. We also examine the welfare implications of a voluntary import expansion (VIE), which is the import side counterpart of a VER. It is shown that the imposition of a VIE is at least as harmful as the imposition of a VER from the point of view of social welfare.
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