A major advantage of long-term contracts over short-term contracts is that they increase the incentives of the contracting parties to:
A)practice holdup actions.
B)practice arbitrage.
C)undertake spot market transactions.
D)make firm-specific investment.

Question

Quizplus · Accepted Answer

Long-term contracts provide more certainty and stability in the relationship between the parties, which in turn will lead to a higher likelihood of investing in firm-specific assets, such as specialized equipment, customized training, or specialized production processes. These investments can result in efficiency gains or cost savings but are generally risky as they are specific to the needs of the contracting parties. Long-term contracts reduce the risk associated with these investments, which gives the parties more incentives to make them.

A Major Advantage of Long-Term Contracts Over Short-Term Contracts Is