The Demand Externality of Automation

Erhan Bayraktar

Papers from arXiv.org

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.

Date: 2026-05
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