This article models how a level of management between workers and the owner of a firm can affect the owner's decision either to internally integrate a function to make inputs or to contract out to buy inputs from an independent supplier. In the model, a self-serving manager can direct her workers to perform activities that serve her interests rather than those of the firm. This reduces the effectiveness of worker performance incentives intended to promote efforts that benefit the owner. Incentives may have to be increased to a level such that the owner prefers to buy inputs rather than make them internally.