About this Journal Submit a Manuscript Table of Contents
Economics Research International
Volume 2011 (2011), Article ID 491278, 13 pages
http://dx.doi.org/10.1155/2011/491278
Research Article

The Elasticity of Substitution and the Sector Bias of International Outsourcing

Department of Economics, Helmut Schmidt University-University FAF Hamburg, Holstenhofweg 85, 22043 Hamburg, Germany

Received 14 December 2010; Accepted 10 April 2011

Academic Editor: Priya Ranjan

Copyright © 2011 Daniel Horgos. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Considering a possible sector bias of international outsourcing within a 2 × 2 framework, four different scenarios appear. The relative high or the relative low-skill intensive industry can relocate either its high or its low-skill intensive production fragment. Traditionally, depending on the superiority of either the wage or the outsourcing effect, general equilibrium effects are regarded as ambiguous in two of the four scenarios. In this contribution, I provide a formal approach and a calibration exercise for the German economy. Results show that a focus on the elasticity of substitution can complete the picture. When the elasticity exceeds a critical value, results are unambiguous in all four scenarios, supporting the existence of the sector bias of international outsourcing.