A contingent contract can create production inefficiency; however,many principals accept this because
A) inefficiency is inevitable.
B) monitoring is costless.
C) risk is reduced.
D) profit will increase as a result.

Question

Quizplus · Accepted Answer

Principals are willing to accept production inefficiency created by a contingent contract because it reduces their risk. Contingent contracts specify conditions under which payments will be made, thereby reducing the uncertainty that exists in the absence of such agreements. This reduces the principal's risk of loss due to uncertain outcomes.

A Contingent Contract Can Create Production Inefficiency; However,many Principals Accept