DP16022 Putty-Clay Automation

Author(s): Joseba Martinez
Publication Date: April 2021
Date Revised: April 2021
Keyword(s): aggregation, automation, Factor shares, Vintage capital
JEL(s): E1, E22, E25, O4
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16022

This paper develops a model of automation as an embodied technology. The gradual discovery and obsolescence of technologies gives rise to a distribution of capital with varying degrees of automation. I derive conditions under which, aggregating over heterogeneous production units, output can be represented as a CES production function, the parameters of which are determined endogenously by the distribution of technology. Through the lens of the canonical model, I show how the distribution of automation technology determines its aggregate effects; in the long run, only the distribution of technology matters. The transition dynamics of the economy in response to an increase in frontier automation technology are consistent with notable micro and macro US stylized facts of recent decades: at the firm level, a fall in the labor share driven by reallocation towards low labor share establishments; at the macro level, slowing total factor productivity growth and a fall in the real interest rate.