The Demand Externality of Automation

TL;DR

This paper analyzes the economic tradeoffs of automation, considering its effects on productivity, income distribution, and welfare within a heterogeneous-agent general equilibrium framework.

Contribution

It introduces a dynamic model capturing how automation impacts output, wealth distribution, and household welfare, highlighting potential excesses driven by income and ownership structures.

Findings

Automation increases output, capital, and consumption under certain conditions.

Privately driven automation may be excessive due to income and ownership concentration.

Fiscal policy can influence automation's effects through taxation and redistribution.

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.