Tariffs versus quotas with strategic investment

The relative efficiency of tariffs versus quotas is analysed in a Cournot oligopoly with strategic investment, introducing quota licence fees to neutralize the international distributional effect. When such licence fees remove quota rents from foreign firms, then for the case of constrained entry with a sufficiently large number of firms, quotas frequently hold a welfare advantage, since tariffs relatively aggravate the ineffeciency from overinvestment. In the case of free entry and exit, however, tariffs hold a welfare advantage, since there is greater benefit of increasing returns to scale to the economy by avoidance of excessive entry of firms. JEL Classification: F1, L1.