Scaling of Information Costs in Firms

Abstract: What a firm does is more revealing than how much it makes, but firms are often described with economic metrics. Here, we characterize what firms read, their information footprint, using a data set of hundreds of millions of records of news articles accessed by employees in millions of firms. We relate a firm's information footprint with economic variables, showing that the former grows superlinearly with the latter. This exaggerates the classic Zipf's law inequality in the economic size of firms and reveals an economy of scale with respect to information. Second, we discover that the reading habits of firms are of limited diversity. Firms above a certain size reduce the relative diversity of information they consume, indicating the sudden onset of a coordination cost. Third, we reconstruct the topic graph firms inhabit and propose a simple model of firm growth in this space. Firms adhere to a mixed strategy of local exploration and recurrent exploitation on the topic graph. This strategy is costly, and we predict that firms consume a prodigious amount of information over their lifetimes because they cumulatively add to their information portfolio instead of diversifying. This shows that the costs of information and the structure of the space of ideas provide a useful but little explored perspective on firm growth.