Martin Beraja (MIT): "Inefficient Automation" with 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. The reason is that there is a conflict between how firms and displaced workers value the effects of automation over time. The government finds it optimal to tax automation on efficiency grounds, even when it does not
value equity. Slowing down automation increases aggregate consumption and redistributes early on during the transition, precisely when displaced workers value it more. Using a quantitative version of our model, we find that the optimal speed of automation is considerably lower than at the laissez-faire. The optimal policy improves efficiency and achieves substantial welfare gains.