On Pareto-improving voluntary export restraints

Abstract

This paper develops the argument that binding voluntary export restraints (VERs) may raise the profits of all firms and the welfare of all trading partners. This possibility is shown to arise in a model of Cournot oligopoly and is consistent with the theory of the second best. VERs benefit unconstrained firms. If the favorable effect due to the increase in domestic import price outweighs the adverse effect due to a loss in market share, then VERs will also benefit constrained firms. VERs will improve the importing country's welfare if they raise the profits of domestic firms more than they reduce domestic consumer surplus. The paper synthesizes these findings and derives conditions for VERs to be Pareto-improving.