Contingent contracts
A)are inefficient when monitoring is possible.
B)equally divide the risk between principal and agent.
C)can be used when monitoring is not reasonably possible.
D)put the risk on the principal.

Question

Quizplus · Accepted Answer

Contingent contracts are used when monitoring is not reasonably possible, as they create incentives for the agent to behave in the best interest of the principal even in uncertain circumstances. This helps the principal to manage risk and achieve their objectives, while minimizing the risk of opportunistic behavior by the agent. Therefore, choice C is correct. Choices A, B, and D are incorrect because they do not accurately represent the nature and purpose of contingent contracts.

Contingent Contracts