A Dynamic Model with Import Quota Constraints

41 Pages Posted: 5 Mar 2002 Last revised: 4 Sep 2015

See all articles by Anna Pavlova

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2010

Abstract

A collapse in international trade following the 2007-08 crisis has underscored many dangers of globalization and renewed interest in trade protectionism, one form of which is import quotas. 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.

Keywords: Quota, International Economics and Finance, Asset Pricing, Integral Constraints

JEL Classification: D51, F13, F30, F40, G12

Suggested Citation

Pavlova, Anna and Basak, Suleyman, A Dynamic Model with Import Quota Constraints (January 15, 2010). Available at SSRN: https://ssrn.com/abstract=300520 or http://dx.doi.org/10.2139/ssrn.300520

Anna Pavlova

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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