Capturing knowledge within and across firm boundaries: Evidence from clinical development

How do firm boundaries influence employees' acquisition of information? Using detailed project-level data and qualitative evidence, I document that pharmaceutical firms are more likely to outsource the coordination of data-intensive clinical trials, while they are more likely to assign knowledge-intensive trials to internal teams. Managers do not choose between market and hierarchy, but between the hierarchy of the firm-in which subjective performance evaluations are combined with flat explicit incentives-and the hierarchy of its subcontractor-whose virtue stems precisely from the ability to provide high-powered incentives on a narrow set of monitorable tasks.