Suppose a new contracting environment that requires greater specialized investments is considered.This new contract will result in:
A) an increase in the marginal benefit and a longer optimal contract.
B) an increase in the marginal benefit and a shorter optimal contract.
C) a decrease in the marginal benefit and a longer optimal contract.
D) a decrease in the marginal benefit and a shorter optimal contract.

Question

Quizplus · Accepted Answer

In a contracting environment that necessitates greater specialized investments, the marginal benefit of the contract increases because the specialized investments are expected to yield higher returns. This situation typically leads to a longer optimal contract duration to fully realize the benefits of the specialized investments over time.

Suppose a New Contracting Environment That Requires Greater Specialized Investments