The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper shows that the presence of quotas on imported inputs that are based on installed capacity can lead to capacity underutilization in manufacturing industries of developing countries. A replacement of such quotas, by tariffs leads to full capacity utilization under assumptions of both perfectly and imperfectly competitive markets. Furthermore, such a policy also eliminates strategic advantages for oligopolistic firms that arise in quota-based regimes.