The Dark Side of AI

Edoardo Marchesi, Finance PhD Student

The emergence of Artificial Intelligence (AI) as a viable business solution has led to a massive increase in the demand for computing power. While the direct benefits of the inclusion of AI technologies in day-to-day business operations are rather clear, much has to be unveiled regarding the spillovers coming from this new type of technology. Leveraging the geographical dispersion of data centers in the state of New York, I (Marchesi) study how the local entrepreneurial environment is affected by an increase in the rise of AI’s popularity. Preliminary estimates show that the rise of AI usage leads to fewer businesses being started in areas where data centers are located, more businesses getting dissolved and a net negative effect on the total stock of firms. The mechanism relating demand for AI services and sluggish business creation is one entailing resources’ diversion: when demand for AI services is high, the computational burden placed on data centers is also higher, causing an increase in the demand for electricity. The heightened electricity demand puts upward pressure on prices, discouraging entrepreneurial activity in the affected areas.