Publication

This paper deals with the question of how sensitive outsourcing from a high-technology area with high production costs to a low-technology and low-cost area reacts to changes in production costs or productivity. The author examines the case of Western European outsourcing to Eastern European countries. He provides a detailed analysis of Cournot competition in intermediate goods as perfect substitutes. The author finds that higher production costs in one region reduces intermediate good production in both regions leading to a substitution effect between high- and low-skilled labor intensive inputs rather than between eastern and western low-skilled labor intensive inputs.