Not a Typical Firm: Capital–Labor Substitution and Firms' Labor Shares

This paper resolves a puzzle that sits at the heart of the automation debate: if machines are replacing workers, why do most firms show rising labor shares? The answer is heterogeneity — large firms automate and drive down the aggregate labor share, while small firms remain labor-intensive because automation has fixed costs. For product directors this is a model of how technology adoption creates winner-take-all dynamics: the same AI capabilities that help large firms reduce headcount may be economically inaccessible to smaller competitors. The mathematics are rigorous but the insight travels: automation is not a uniform tide but a differentiating force that reshapes industry structure. Essential reading alongside Brynjolfsson for understanding how AI transforms not just work but competition.