Janus-Faced Technological Progress and the Arms Race in the Education of Humans and Chatbots

TL;DR

This paper models how technological progress and wage distributions can lead to an inefficient educational and AI investment race, increasing inequality and potentially reducing overall welfare.

Contribution

It introduces a model linking technological advances, wage distributions, and investment incentives, highlighting the risk of an arms race in education and AI development.

Findings

Technological progress incentivizes an exponential increase in skills and wages.

Wage distributions and technological growth can lead to an inefficient investment race.

Overinvestment in education and AI can increase GDP and inequality but reduce welfare.

Abstract

We study the conditions under which technological advances, in combination with a lognormal wage distribution, incentivize agents into an inefficient educational arms race. Our model emphasizes that lognormal wage distributions imply that agents' wages increase exponentially in the level of their skill as well as in the level of technology. In turn, this exponential relation between skills, technology, and wages pressures agents into an exhausting race for the tails of the economy's skill distribution. Moreover, technological advances and overinvestment in education increase GDP and inequality, while welfare may decline. In an alternative interpretation, our model studies firms that invest in artificial intelligence of their chatbots and AI agents. For a wide range of specifications, firms, just like humans, have an incentive to choose corner solutions where investment is limited only by borrowing constraints.