Import quota allocation between regions under Cournot competition

The paper analyzes the impact of import quotas on the welfare of different regions belonging to a single country. The regions compete with one another using Cournot conjectures and international trade is hindered by import quotas. Our results can help the country to determine the optimal import quotas and the best way to allocate import permits between regions. We find three mains results. First, we show how the world price, the difference in production costs between regions and the relative market size determine the allocation of import quotas, the interregional trade and the rent of import permits holders. Second, we show that in the presence of interregional trade in both directions, the region with the largest market size will obtain the largest share of imports while in the absence of trade, the allocation of import permits between regions also depends on the production cost asymmetry. Third, when only the most efficient region exports to the least efficient one, production cost asymmetry, transaction costs and world price determine whether the smaller or larger region obtains the larger share of importations allowed under import quotas.