Working Paper
Toward a Bad Job Economy: AI Adoption, Agency Costs, and JobDesign
This version: April 2026
JEL: D86, J41, O33, L23
Abstract
We study how AI affects compensation and job design when performance depends on workers’ non-contractible effort. In a principal–agent model with limited liability, AI reduces effort costs but disproportionately lowers the cost of achieving satisfactory performance. This raises the incentive cost of sustaining high effort and can induce firms to replace high-wage, high-effort good jobs with low-wage, low-effort bad jobs, even when good jobs create more total surplus. As a result, AI can lower wages, reduce worker welfare, and even depress profits. If workers can adopt AI unilaterally, adoption occurs even when the resulting equilibrium harms both parties; when adoption requires worker cooperation, resistance is strongest where AI erodes rents embodied in good jobs. In a search-and-matching extension, endogenous outside options amplify these forces, reinforcing a bad-job economy and potentially reducing employment.
Acknowledgements
We thank Steffen Altmann, Zsófia Bárány, Daniel Barron, Kevin Bryan, Yi Chen, Wouter Dessein, Luis Garicano, Jie Gong, Anna Gumpert, Anders Humlum, Uta Schönberg, Heiner Schumacher, and Eduard Talamas, as well as audiences at seminars at Harvard Business School, the National University of Singapore, Ulm, and the University of Hong Kong, and at the 2nd Asian Conference on Organizational Economics (HKU), the 2025 CESifo-TransforM Workshop on the Economic and Societal Impacts of AI (Munich), and the workshop “The Economics and Business of Artificial Intelligence” (HKUST).
Related Research
Suggested Citation
Fahn, M., Li, J., & Sun, C. (2026). Toward a bad job economy: AI adoption, agency costs, and job design (CAMO Working Paper No. 2026-01). HKU Centre for AI, Management and Organization. https://camo.hku.hk/toward-a-bad-job-economy-ai-adoption-agency-costs-and-job-design/
BibTeX
@techreport{fahn_li_sun_2026_badjob,
title = {Toward a Bad Job Economy: AI Adoption, Agency Costs, and Job Design},
author = {Fahn, Matthias and Li, Jin and Sun, Chang},
institution = {HKU Centre for AI, Management and Organization},
type = {{CAMO} Working Paper},
number = {2026-01},
year = {2026},
month = apr,
url = {https://camo.hku.hk/toward-a-bad-job-economy-ai-adoption-agency-costs-and-jobdesign/}
}