ABSTRACT
Coase explained the firm as the answer to transaction costs. Work stays inside when specifying, verifying and directing outsiders costs more than hiring employees. This note argues that AI erodes the assumptions behind that answer, rather than merely lowering the costs. Engineered systems known as harnesses largely complete contracts in real time, make external work more observable than employment, and carry context and control across the firm’s edge. As a result, the boundary that predicts where context sits, who controls the work, and where knowledge accumulates becomes the instrumented system, not the legal entity. Legal services, the profession organised most completely around Coasean frictions, is the worked example. Three tests decide the order in which work migrates. Three un-Coasean consequences follow. The boundary becomes something providers compete to move, knowledge pools with them, and incentives invert toward legal dispute prevention. Four conditions identify which other sectors restructure. The argument is predictive because the external-harness model is still early, and the pace is set by organisational inertia rather than the technology itself.
Kingsley-Williams, Mark and Tallon, Lucy and Juric Williams, Mijo, Reconsidering Coase in the Age of AI: Why the Boundary of the Firm Is Eroding, with Legal Services as the Worked Example (August 11, 2026).
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