Economics of Human and AI Collaboration: When is Partial Automation More Attractive than Full Automation?

This paper develops a unified framework for evaluating the optimal degree of task automation. Moving beyond binary automate-or-not assessments, we model automation intensity as a continuous choice in which firms minimize costs by selecting an AI accuracy level, from no automation through partial human-AI collaboration to full automation. On the supply side, we estimate an AI production function via scaling-law experiments linking performance to data, compute, and model size. Because AI systems exhibit predictable but diminishing returns to these inputs, the cost of higher accuracy is convex: good performance may be inexpensive, but near-perfect accuracy is disproportionately costly. Full automation is therefore often not cost-minimizing; partial automation, where firms retain human workers for residual tasks, frequently emerges as the equilibrium. On the demand side, we introduce an entropy-based measure of task complexity that maps model accuracy into a labor substitution ratio, quantifying human labor displacement at each accuracy level. We calibrate the framework with O*NET task data, a survey of 3,778 domain experts, and GPT-4o-derived task decompositions, implementing it in computer vision. Task complexity shapes substitution: low-complexity tasks see high substitution, while high-complexity tasks favor limited partial automation. Scale of deployment is a key determinant: AI-as-a-Service and AI agents spread fixed costs across users, sharply expanding economically viable tasks. At the firm level, cost-effective automation captures approximately 11% of computer-vision-exposed labor compensation; under economy-wide deployment, this share rises sharply. Since other AI systems exhibit similar scaling-law economics, our mechanisms extend beyond computer vision, reinforcing that partial automation is often the economically rational long-run outcome, not merely a transitional phase.