We study an agency model with vertical hierarchy—the principal, the prime-agent and the subagent. The principal faces a project that needs both agents’ services. Due to costly communication, the principal receives a report only from the prime-agent, who receives a report from the subagent. The principal can directly incentivize each agent by setting individual transfers (insourcing), or sets only one overall transfer to an independent organization in which the prime-agent hires the subagent (outsourcing).