QUOTA LICENSES FOR IMPORTED CAPITAL EQUIPMENT - COULD BUREAUCRATS EVER DO BETTER THAN THE MARKET

Despite valid criticisms, many developing countries have issued non-tr ansferable import licenses to a limited number of final-good producers so as to restrict imports of an input, such as capital equipment. Thi s paper demonstrates that for a given import quota, such licensing res trictions can actually increase domestic production of both the input and the final product, but at the cost of reduced quota rents. Under p ure competition, domestic welfare falls relative to the use of marketa ble quota licenses, but if foreigners would get the quota rents, or if external economies cause decreasing costs, then bureaucratic allocati on can dominate.