| Summary: | This Paper develops a continuous-time two-sector model to study the economic
effects of an import quota during the period of time over which it is imposed. One of
the sectors is protected by a quota, which in our set-up manifests itself as an integral
constraint on the flow of imports of the protected commodity. In sharp contrast to the
existing literature, our small open economy exhibits distinctly different economic
behaviour 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, existing work predicts no economic effects of a quota unless
it is binding. Within a general equilibrium world economy consisting of one
quota-constrained and one unconstrained country, under logarithmic preferences, the
constrained country becomes wealthier at the expense of the unconstrained.
Moreover, the stock price of the protected industry increases in the quota-constrained
and decreases in the unconstrained country
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