Automation and Asset Pricing Theory

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In this article about asset pricing theory, we examine the research on the impact of technological advances that displace human labor in favor of machine capital to asset pricing.

Automation and the displacement of labor by capita: Asset pricing theory and empirical evidence

  • Jirí Knesl
  • Journal of Financial Economics, 2023
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

What are the Research Questions?

Advances in technologies and automation prompted this study which answers the following question:

1. Does displaceable labor affect firms’ value and exposure to technology shocks?

What are the Academic Insights?

The author develops a general equilibrium model of optimal technology adoption with heterogeneous firms that monopolistically compete in product markets, and heterogeneous households that experience uninsurable idiosyncratic labor-income shocks. While automation can benefit an individual firm, it entails adoption cost. By studying the occupational characteristics from the O∗Net database, stock information from CRSP, and the composition of the labor force from Occupational Employment Statistics (OES), the author finds:

1. Firms with a high share of displaceable labor have more negative exposure to technology shocks.

2. A long-short portfolio sorted on this variable mimics macroeconomic measures of technology shocks. Negatively exposed firms earn a 4% annual return premium consistent with displacement risk from technological progress.

Why does it matter?

In a competitive environment, firms’ automatable labor increases riskiness. This paper shows that automation becomes a costly necessity for firms and erodes potential rents from technological improvements while efficiency gains are passed on to consumers.

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