CONCEPT
The Firm as Knowledge Container
Hidalgo's revision of Coase's transaction-cost theory: firms exist not because internalization is cheaper but because productive knowledge is distributed and sticky, requiring institutional structures to coordinate.
Ronald Coase argued in 1937 that firms exist because market transactions have costs that internalization reduces. Hidalgo offers a different answer: firms exist because productive knowledge is distributed across individuals and resists transfer between them. No individual holds all the knowledge needed to produce a complex product; the knowledge cannot be easily transmitted because it is tacit, contextual, and embedded in specific relationships. The firm is an institutional structure that holds productive knowledge in a form allowing it to be combined, coordinated, and deployed toward producing things no individual could produce alone. This framework predicts how AI will reshape organizations: not by dissolving firms but by changing what the firm contains — externalizing codifiable knowledge to the tool while preserving tacit knowledge inside institutional structure.
In The You On AI Field Guide
The distinction between Coase's transaction-cost firm and Hidalgo's knowledge-container firm determines how one thinks about what AI does to organizations. If the firm is a bundle of internalized transactions,