The Reverse Big Push: Generative AI and Self-Fulfilling Automation

Soumen Banerjee and Jianguo Wang

Papers from arXiv.org

Abstract: Generative AI relocates the fixed cost of automation. A model provider pays to train a frontier system, while a downstream firm rents capability by usage; the same firm must carry a continuing payroll to supply a human-augmented service. We study this asymmetry in a local service economy with household budgets and a market-clearing wage. Human augmentation earns a larger surplus from an additional customer, whereas automation has the lower break-even scale. Payroll supports demand across sectors. Wage adjustment works against this feedback but does not generally undo it: when the wage-income effect dominates the fall in the wage bill per retained worker, production modes are strategic complements. The economy can then possess both a high-demand human-augmented equilibrium and a low-demand automated equilibrium. The former is the local first best, even when flexible wages prevent a firm-profit ranking. With forward-looking firms and staggered revision opportunities, the same inherited employment structure can support an automation cascade or an augmentation recovery; the anticipated path of later adopters validates the first movers' choices. Under the regularity and boundary conditions of Frankel and Pauzner, a public aggregate shock selects a unique state-contingent path, while the vanishing-friction limit selects according to risk dominance. A transparent parameterization anchored to professional-services revenue-to-payroll ratios illustrates how high-autonomy uses can enter the coordination region and how wage adjustment compresses that region. Optimal policy combines the adoption wedge created by demand spillovers with a temporary bridge when the low state is locally self-sustaining.

Date: 2026-08
New Economics Papers: this item is included in nep-inv
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2608.25602 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2608.25602

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().