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Inefficient Automation

Author

Listed:
  • Martin Beraja
  • Nathan Zorzi

Abstract

How should the government respond to automation? We study this question in a heterogeneous agent model that takes worker displacement seriously. We recognize that displaced workers face two frictions in practice: reallocation is slow and borrowing is limited. We analyze a second best problem where the government can tax automation but lacks redistributive tools to fully alleviate borrowing frictions. The equilibrium is (constrained) inefficient and automation is excessive. Firms do not internalize that automation depresses the income of automated workers early on during the transition, precisely when they become borrowing constrained. The government finds it optimal to slow down automation on efficiency grounds, even when it does not value equity. Quantitatively, the optimal speed of automation is considerably lower than at the laissez-faire. The optimal policy improves efficiency and delivers meaningful welfare gains.

Suggested Citation

  • Martin Beraja & Nathan Zorzi, 2025. "Inefficient Automation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(1), pages 69-96.
    • Handle: RePEc:oup:restud:v:92:y:2025:i:1:p:69-96.
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    File URL: http://hdl.handle.net/10.1093/restud/rdae019
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    Cited by:

    1. Firooz, Hamid & Liu, Zheng & Wang, Yajie, 2025. "Automation and the rise of superstar firms," Journal of Monetary Economics, Elsevier, vol. 151(C).
    2. Isaac Baley & Ana Figueiredo & Cristiano Mantovani & Alireza Sepahsalari, 2025. "Self-Insurance in Turbulent Labor Markets," Working Papers 1538, Barcelona School of Economics.
    3. J. Carter Braxton & Bledi Taska, 2025. "Technological Change and Insuring Job Loss," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 58, October.
    4. Yongheng Hu, 2025. "Heterogeneous Agents in the Data Economy," Papers 2509.09656, arXiv.org.
    5. Yongheng Hu, 2025. "Analysis Theory of Data Economy: Dataization, Technological Progress and Dynamic General Equilibrium," Papers 2507.13274, arXiv.org, revised Jul 2025.
    6. Auray, Stéphane & Eyquem, Aurélien, 2025. "On automation, labor reallocation and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 177(C).
    7. Seelent, João Felipe Capioto & Lermen, Fernando Henrique & Franco, Cíntia Wilke & Benitez, Guilherme Brittes, 2025. "Managing paradoxical tensions between Corporate Social Responsibility and Automation: How organizations reach sustainability and digital transformation," International Journal of Production Economics, Elsevier, vol. 288(C).
    8. Ünveren, Burak & Durmaz, Tunç & Sunal, Seçkin, 2023. "AI revolution and coordination failure: Theory and evidence," Journal of Macroeconomics, Elsevier, vol. 78(C).
    9. Basso, Henrique S. & Rachedi, Omar, 2025. "Robot adoption and inflation dynamics," Journal of Monetary Economics, Elsevier, vol. 156(C).
    10. Nuriye Melisa Bilgin & Ester Faia & Gianmarco Ottaviano, 2026. "Technology spillovers, diffusion and rivalry in firm networks," CEP Discussion Papers dp2157, Centre for Economic Performance, LSE.

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    Keywords

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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