We develop an assignment model of automation. Each of a continuum of tasks of variable complexity is assigned to either capital or one of a continuum of labor skills. We characterize conditions for interior automation, whereby tasks of intermediate complexity are performed by capital. Interior automation arises when low-skill wages are low and effective cost of capital in low-complexity tasks is high. Minimum wages make interior automation less likely. Higher capital productivity causes employment and wage polarization, changes the skill premium nonmonotonically, and reduces the real wage of workers with comparative advantage profiles close to that of capital.

This article studies the effects of automation in a task-based economy in which some jobs pay workers rents—wages above workers' outside options. We show that automation targets high-rent tasks, dissipating rents, amplifying wage losses, and reducing within-group wage dispersion in exposed groups. This form of rent dissipation is inefficient and offsets the productivity gains from automation. Using U.S. data from 1980 to 2016, we find evidence of sizable rent dissipation and reduced within-group wage dispersion due to automation. Automation accounts for 52% of the increase in between-group inequality since 1980, with rent dissipation explaining one-fifth of this total. Our estimates imply that inefficient rent dissipation has offset 60%–90% of the productivity gains from automation over this period.

We present a model where social media platforms offer plans that intermix entertaining content with digital advertising (“ads”). Users derive utility from entertainment and learn about their valuation for a product from ads. While some users are fully rational, others naïvely perceive digital ads as more informative than they actually are. We characterize the profit-maximizing business model of the platform and show that welfare is lower when the platform monetizes through advertising instead of subscription both for naïfs (because they are targeted by intense digital advertising, which makes them over-optimistic about product quality and over-purchase the product) and for sophisticates (because the inflated demand from naïfs increases the firm’s price). This negative welfare effect is intensified when the platform can offer mixed business models that separate the naïve and sophisticated users into different plans. Our results are robust to firm-level and platform-level competition, because digital ads soften competition between both firms and platforms. We also show how digital ad taxes can improve welfare.<br><br>Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at <a href="http://www.nber.org/papers/w33017" TARGET="_blank">www.nber.org</a>.<br>