Artificial Intelligence in Team Dynamics: Who Gets Replaced and Why?

Xienan Cheng, Mustafa Dogan and Pinar Yildirim

No 34259, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This study investigates the effects of artificial intelligence (AI) adoption in organizations. We ask: (1) How should a principal optimally deploy limited AI resources to replace workers in a team? (2) In a sequential workflow, which workers face the highest risk of AI replacement? (3) How does substitution with AI affect both the replaced and non-replaced workers’ wages? We develop a sequential team production model in which a principal can use peer monitoring—where each worker observes the effort of their predecessor—to discipline team members. The principal may replace some workers with AI agents, whose actions are not subject to moral hazard. Our analysis yields four key results. First, the optimal AI strategy stochastically replaces workers rather than fixating on a single position. Second, the principal replaces workers at the beginning and at the end of the workflow, but does not replace the middle worker, since this worker is crucial for sustaining the flow of information obtained by peer monitoring. Third, the principal may optimally underutilize available AI capacity. Fourth, the optimal AI adoption increases average wages and reduces intra-team wage inequality.

JEL-codes: D20 L0 M0 M12 M2 M21 M5 M52 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-ain, nep-hrm and nep-mic
Note: IO PR
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