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The Elasticity of Substitution and the Sector Bias of International Outsourcing: Solving the Puzzle

Daniel Horgos

No 88/2009, Working Paper from Helmut Schmidt University, Hamburg

Abstract: Considering the sector bias of International Outsourcing within a 2x2 framework, four different scenarios appear. Each industry can either relocate its high or its low skill intensive production fragment. Traditionally, depending on the superiority of a wage vs. an outsourcing-effect, general equilibrium effects of two scenarios are assumed to be ambiguous. Applying a formal duality approach and a calibration exercise for the German economy, this contribution shows that a focus on the elasticity of substitution can solve the puzzle. With the elasticity exceeding a critical value, unambiguous results in all four scenarios appear, supporting the sector bias of International Outsourcing.Finally, the introduction of distributional constraints into the allocative decisions leads to a decisive worsening in the supply of the public good.

Keywords: International Outsourcing; Sector Bias; Elasticity of Substitution (search for similar items in EconPapers)
JEL-codes: E25 F16 F41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2009-01-29
New Economics Papers: this item is included in nep-mac and nep-opm
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