Man vs. Machine: When Is Automation Inferior to Human Labor?

Pinar Yildirim, Marketing, The Wharton School, and Mustafa Doğan, MIT Sloan School of Management

Abstract: Studying factors that influence adoption of new products and technologies lies at the heart of marketing. In this paper, we study a manager’s decision to adopt automation for a production process. Automation offers efficiency by generating consistent high input at low operating costs. But at the same time, it reduces the interaction among employees and reduces a manager’s ability to take advantage of employees’ peer monitoring capacity. We study how automating some tasks in a production process influences the effort of the employees working on the same process, and whether and when a manager should choose to automate the production process. Comparing the costs of an automated production system to one that is not, we show that while automation provides significant cost-cutting benefits, it may still result in an overall costlier system because of the increase in the cost of incentivizing the remaining employees. We show that as some tasks in production can be automated and automation becomes gradually more cost-efficient, human teams are less likely to be employed under cooperative contracts which reward an employee for his peer’s achievement, but rather under competitive contracts which reward an employee for achievements better than his peer.