“AI agents — autonomous systems that perceive, reason, and act on behalf of human principals — are poised to transform digital markets by dramatically reducing transaction costs,” wrote Peyman Shahidi, Gili Rusak, Benjamin Manning, Andrey Fradkin, and John Horton in their recent NBER working paper, “The Coasean Singularity? Demand, Supply, and Market Design with AI Agents.”
The authors argue that the broad adoption of AI agents will have far-reaching economic consequences. While the exact outcomes remain uncertain, the underlying forces are familiar: supply and demand will shape how agents are deployed, and technological change will alter the relative costs of economic activities. To understand these shifts, they turn to a foundational insight from economics — Ronald Coase’s 1937 theory of the firm.
Why do firms exist? This question has long been central to economic theory, most notably to the theories of Ronald Coase, the eminent British economist and recipient of the 1991 Nobel Prize in economics. In his 1937 seminal paper, “The Nature of the Firm,” Coase explained that in principle, firms could rely entirely on open markets to procure goods and services efficiently. In practice, however, markets are not frictionless. Transaction costs — searching for suppliers, negotiating contracts, coordinating work, and managing intellectual property — make purely market-based coordination costly and inefficient. Firms emerged as a way to reduce these costs and organize economic activity more effectively.
A firm will expand as long as it is cheaper to perform additional activities internally than to contract them out in the marketplace. But this expansion has limits. As firms grow, they often become more hierarchical and bureaucratic, which can slow decision-making and reduce adaptability. Successful organizations therefore seek an optimal balance between internal production and external sourcing — the classic “make-or-buy” decision. (more…)