Quotas in General Equilibrium

We study economies with quotas and other quantity-based distortions. Unlike economies with wedge-based distortions, economies with quotas are constrained efficient, not subject to the theory of second best, and satisfy macro-envelope conditions. Thus, the aggregate effects of changes in technologies, distortions, and policy 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.