Quotas in General Equilibrium

We study economies with quotas and other quantity-based distortions. We prove that any feasible distorted allocation can be implemented as the competitive equilibrium of a quota economy. Unlike wedge-based representations of distortions, quota economies are constrained efficient, not subject to the theory of second best, and satisfy macro-envelope conditions. Hence, the effects of technology, distortions, and policy changes can be summarized by a small set of sufficient statistics. We provide a nonparametric and nonlinear characterization of how quota and productivity changes affect aggregate output, and we derive the welfare costs of misallocation from an inverse demand system that maps quota prices to quota levels. We illustrate the framework by quantifying the effects of reforms in several settings: raising the cap on H-1B visas, relaxing single-family zoning in U.S. cities, eliminating New York City’s taxi medallions, phasing out U.S. quotas on Chinese textiles and apparel, and removing capital controls in Argentina. Across these applications, our method flexibly measures the costs of quota distortions and the gains from reform.