Long-term contracts are NOT efficient if:
A) a firm engages in relationship-specific exchange.
B) specialized investments are unimportant.
C) the contractual environment is simple.
D) managers shirk.

Question

Quizplus · Accepted Answer

Long-term contracts are designed to protect specialized investments made by parties, such as investments in personnel, equipment or technology. If specialized investments are unimportant, then the costs and risks of having a long-term contract may outweigh the benefits. Therefore, long-term contracts may not be efficient in such situations.

Long-Term Contracts Are NOT Efficient If