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A Dynamic Model with Import Quota Constraints

  • Basak, Suleyman
  • Pavlova, Anna

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

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File URL: http://hdl.handle.net/1721.1/5419
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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4230-02.

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Date of creation: 09 Jul 2004
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Handle: RePEc:mit:sloanp:5419
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  2. Jagdish Bhagwati & Arvind Panagariya & T. N. Srinivasan, 1998. "Lectures on International Trade, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522470, June.
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