Why exporting countries agree to voluntary export restraints: the oligopolistic power of the foreign supplier

This paper studies the impact of VER on an exporting country. It shows that a VER at the free-trade level favours the concentration of industry, allows firms with an export licence to expand, causes the contraction of the size of the firms producing for the domestic market only, and raises the price mark-up in the domestic market. The impact on welfare is indeterminate depending upon the effect on global efficiency. If a VER is binding, also the price mark-up in the foreign market rises and this effect on terms of trade, ceteris paribus, is welfare improving. An applied general equilibrium model for Turkey supports the conjecture that with a VER the increased oligopolistic power of incumbent firms with an export licence, the higher price mark-up in the domestic market and a possible social welfare gain, are the key elements in understanding the rationale behind VERs. However, if authorities induce firms to engage in unproductive profit-seeking activities, rent dissipation occurs and the impact on social welfare becomes negative. Copyright (c) Scottish Economic Society 2003.