Robots, Operational Flexibility, and Firm‐Level Inefficiency Gap

ABSTRACT This paper investigates the impact of robot adoption on firm‐level inefficiency gaps, defined as the wedge between the value of the marginal product of labor and the market wage. We develop a theoretical framework where firms endogenously assign robots and labors to different production tasks based on comparative advantage. Because robots incur lower adjustment costs than human labor, a higher robot‐to‐labor ratio enhances operational flexibility. This flexibility allows firms to respond to exogenous demand shocks through more frequent, incremental adjustments, thereby maintaining labor inputs at their optimal levels and narrowing the inefficiency gap. Testing this model with a comprehensive survey of Chinese manufacturing firms (2000–2013), we find a increase in the robot‐to‐labor ratio results in a reduction in the inefficiency gap. Mechanism analysis confirms that automated firms are significantly more likely to execute continuous, small‐scale operational adjustments, validating the role of enhanced operational flexibility in reducing resource misallocation.