The Demand Externality of Automation
TLDR
This paper models automation's economic tradeoffs, showing how it can boost productivity but also create excessive inequality depending on ownership and household characteristics.
Key contributions
- Develops a heterogeneous-agent general equilibrium model to study automation's impact on income and wealth.
- Identifies conditions where automation raises output and consumption, such as broad ownership and high-skill complementarity.
- Shows privately chosen automation can be excessive when ownership is concentrated and low-wealth households are exposed.
- Analyzes fiscal policy's role in managing automation's effects on demand and the collective wage bill.
Why it matters
This research provides a crucial framework for understanding the complex economic effects of automation beyond just productivity gains. It highlights the critical role of wealth distribution and household consumption demand in determining whether automation benefits society broadly or exacerbates inequality. The findings are vital for designing effective fiscal policies to manage these tradeoffs.
Original Abstract
Automation raises productivity and reduces paid human labor, but it also reallocates income and ownership claims. This paper studies that tradeoff in a static benchmark and in a stationary heterogeneous-agent general equilibrium. Firms choose automation from a profit function. Households differ by skill and wealth, save in a capital/equity claim, and face incomplete insurance. Wages and returns are determined by market clearing from a Cobb--Douglas final-good firm, while the wealth distribution is pinned down by a Hamilton--Jacobi--Bellman (HJB) equation and a Kolmogorov forward equation (KFE). The paper is deliberately two-sided. With strong productivity growth, high-skill complementarity, low obsolescence, and broad ownership, automation raises output, capital, and consumption. With strong exposure of low-wealth, high-marginal-propensity-to-consume (high-MPC) households and concentrated ownership, privately chosen automation can be excessive even though it raises high-skilled labor income. The central object is the derivative of household consumption demand and collective wage bill with respect to automation. Fiscal policy is modeled as a government problem rather than as an abstract planner: a tax changes the firm's automation first-order condition, raises revenue only on the remaining automation base, and must specify rebates and administrative losses.
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