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Quota Use under VERs: A theoretical framework and some evidence on MFA quota use

Author

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  • Shumei Gao
  • Jihe Song

Abstract

In this paper, we propose a framework to study quota use under Voluntary Export Restraints (VERs). Our model unifies three strands of literature in finance and international trade policy research: the equivalence between tariff and quotas/VERs, option pricing, and option exercise. We also present evidence on quota utilisation rates for clothing exports under the Multi-Fibre Arrangement (MFA) from the most important Asian suppliers to the EU.

Suggested Citation

  • Shumei Gao & Jihe Song, 2004. "Quota Use under VERs: A theoretical framework and some evidence on MFA quota use," Working Papers E03, Department of Economics, School of Management and Languages, Heriot Watt University.
  • Handle: RePEc:hwe:hwecwp:2004-e03
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    References listed on IDEAS

    as
    1. Krishna, Kala, 1990. "The Case of the Vanishing Revenues: Auction Quotas with Monopoly," American Economic Review, American Economic Association, vol. 80(4), pages 828-836, September.
    2. Riccardo Faini & Jaime Melo & Wendy Takacs, 1995. "A Primer on the MFA Maze," The World Economy, Wiley Blackwell, vol. 18(1), pages 113-135, January.
    3. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
    4. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    5. Richard Harris, 1985. "Why Voluntary Export Restraints Are 'Voluntary.'," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 799-809, November.
    6. Hamilton, Carl, 1986. "An Assessment of Voluntary Restraints on Hong Kong Exports to Europe and the USA," Economica, London School of Economics and Political Science, vol. 53(211), pages 339-350, August.
    7. repec:fth:geneec:93.07 is not listed on IDEAS
    8. Trela, Irene & Whalley, John, 1995. "Internal Quota-Allocation Schemes and the Costs of the MFA," Review of International Economics, Wiley Blackwell, vol. 3(3), pages 284-306, October.
    9. Krishna, Kala, 1993. "Theoretical Implications of Imperfect Competition on Quota License Prices and Auctions," World Bank Economic Review, World Bank Group, vol. 7(1), pages 113-136, January.
    10. Eldor, Rafael & Marcus, Alan J., 1988. "Quotas as options: Valuation and equilibrium implications," Journal of International Economics, Elsevier, vol. 24(3-4), pages 255-274, May.
    11. Spencer, Barbara J., 1997. "Quota licenses for imported capital equipment: Could bureaucrats ever do better than the market?," Journal of International Economics, Elsevier, vol. 43(1-2), pages 1-27, August.
    12. Anderson, James E., 1987. "Quotas as options: Optimality and quota license pricing under uncertainty," Journal of International Economics, Elsevier, vol. 23(1-2), pages 21-39, August.
    13. Murray, Tracy & Schmidt, Wilson & Walter, Ingo, 1983. "On the equivalence of import quotas and voluntary export restraint," Journal of International Economics, Elsevier, vol. 14(1-2), pages 191-194, February.
    14. Cunha, Luis Campos e & Santos, Vasco, 1996. "Sleeping quotas, pre-emptive quota bidding and monopoly power," Journal of International Economics, Elsevier, vol. 40(1-2), pages 127-148, February.
    15. Falvey, Rodney E, 1979. "The Composition of Trade within Import-restricted Product Categories," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1105-1114, October.
    16. Robert C. Feenstra, 1992. "How Costly Is Protectionism?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 159-178, Summer.
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    More about this item

    Keywords

    VERs; quota use; option-pricing; first passage time;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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