Capturing Knowledge within and across Firm Boundaries: Evidence from Clinical Development

Abstract

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.