AI might actually make companies smaller because humans can't process the mountain of machine data fast enough to run big teams.
April 2, 2026
Original Paper
The Interpretive Limits of the Firm: A Mechanical Theory of Corporate Scope in the Age of AI
SSRN · 6508303
The Takeaway
Conventional wisdom says digital tools and AI let companies scale up infinitely by reducing communication costs. This paper argues that the real bottleneck isn't the data, but the 'interpretive limit' of human managers who must validate and act on AI outputs, making massive, complex firms harder to run in the AI age than they were before.
From the abstract
Why do firms remain bounded despite non-rival data, near-zero coordination costs, and scalable digital infrastructures? This paper addresses this “meta-firm paradox” by developing a theory of corporate scope grounded in interpretive limits within human–AI systems. Empirical evidence on diversification documents a persistent discount even after accounting for selection and internal capital market inefficiencies, suggesting limits to cross-domain value creation not explained by existing theories.T