Labor cost, robots, and product quality

Labor cost has rapidly increased in the past decades. However, little is known about its effect on the firm-level robot adoption, and evidence about the consequences of robot adoption on firm production is limited. Based on a novel dataset of robot adoption at the firm-level, we use geographic discontinuity design to identify that labor costs significantly increase robot adoption and further improve product quality. Our findings are robust to alternative specifications and particularly pronounced for foreign firms, and firms with low financial constraints, and general trade, and firms more dependence on unskilled labor, and firms in higher position in the value chain. When adopting robots to substitute labor, firms tend to employ (layoff) skilled (unskilled) labors, which increases expenses on employee training.