Working Paper: NBER ID: w3673
Authors: Kala Krishna; Refik Erzan; Ling Hui Tan
Abstract: Available estimates of tariff equivalents of quotas and welfare calculations on the costs of MFA quotas for developing countries are based on the premise of perfect competition in both product and license markets. It is also assumed that the exporting countries which administer the MFA quotas receive all the scarcity rent. We argue that in the presence of market power on the buyers' side in the product market combined with concentration in the license markets, the importing countries may retain part of this rent, i.e. share it with the exporters. We analyze US imports of apparel products from Hong Kong to see if the data conform with all the relevant predictions of the competitive model. Our method essentially tests whether the license price inclusive Hong Kong price, adjusted for tariffs and transport costs, is equal to the domestic (US) price. A deviation between the two prices is taken to indicate rent sharing. We test the hypothesis with homogeneous goods, modify it to take into account compositional differences and, finally, consider differentiated goods. We find evidence that importers retain a substantial portion of the MFA quota rents.
Keywords: Multifibre Arrangement; Rent Sharing; Apparel Imports; Trade Policy
JEL Codes: F13; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market power on the buyer's side in the product market (L11) | rent sharing with exporters (F10) |
| concentration in the license markets (D45) | rent sharing with exporters (F10) |
| deviation between adjusted Hong Kong price and U.S. price (F31) | indication of rent sharing (D33) |
| market power of buyers (D41) | potential rent per license does not equal actual license price (D45) |
| product differentiation and compositional differences (L15) | implications for rent sharing (D33) |