Managing automation in teams

Abstract

In this paper, we study a principal's decision to introduce automation into a production process governed by a team of employees. When introduced, automation displaces an employee with a machine. This displacement increases efficiency as the machine carries out the tasks of the employee at a lower cost, and reduces the scope of moral hazard as the machine does not make unobserved effort choices. We show that, despite the direct benefits, a principal may prefer not to adopt automation due to its indirect costs. Before automation is introduced, the principal is able to take advantage of her ability to shape the interactions between the team members to manage the agency problem. Automation eliminates this ability and removes an incentive device at the principal's discretion, resulting in an indirect cost. On the one hand, adopting automation is always optimal when the principal incentivizes employees independently, abstaining from creating a team interaction. On the other hand, automation may be suboptimal when the principal incentivizes employees by encouraging them to compete via a “relative performance evaluation” contract or to cooperate via a “joint performance evaluation” contract. We offer two extensions to test the robustness of these findings qualitatively. First, the findings carry through if we consider alternative effects of automation, where it impacts employees symmetrically without displacing any employee. Second, the findings also remain consistent when there are synergies between the efforts of team members.

The Allocation of Decision Authority to Human and Artificial Intelligence

“…For instance,Agrawal et al [2019],Dogan and Yildirim [2017],Dogan et al [2018] andAghion et al [2019] 3 In Aghion and Tirole[1997], P was assumed to have the ability to learn project values with probability E provided they incurred an effort cost. Here, we have endowed P with an AI that can learn on their behalf…”

Strategic automation and decision‐making authority

“…We find that the strategic deployment of automation reduces the informativeness of communication from the manager to the principal. This finding regarding the effect of automation on communication is significant, as it suggests that managing human capital can be a greater challenge for firms that strategically use technology, as Dogan and Yildirim (2022) argue. Managers should keep in mind that, automating lower‐level tasks may influence the communication and reports from the midlevel managers, and, it may impact a principal's reliance on the manager, too.…”

“…Due to the exponential growth in automation and its novel aspects, the interest in the broad implications of automation has been renewed (Acemoglu et al, 2007). In this burgeoning area of research, the prime interest to date has been the effect of automation on jobs and wages (e.g., Acemoglu & Restrepo, 2019;Frey & Osborne, 2017), the interaction between automated and nonautomated systems (Agrawal et al, 2018a(Agrawal et al, , 2018b, and the changing incentives in the workplace following introduction of automation Dogan and Yildirim (2022). A very limited stream focused on the impact of automation on the autonomy of managers (e.g., Athey et al, 2020;Bloom et al, 2014;Sun, 2017).…”