There is an incentive in the short run for suppliers to be inefficient in cost-based contracts because they are rewarded with higher prices.

Question

Quizplus · Accepted Answer

Suppliers may have the incentive to be inefficient in cost-based contracts in the short run because they can pass on the increased costs to the buyer, resulting in higher prices and increased profits for the supplier. However, in the long run, if the buyer becomes aware of the inefficiency and terminates the contract, the supplier may lose future business and reputation, resulting in a loss of profits.

There Is an Incentive in the Short Run for Suppliers