In a Tabular Form Differentiate Between Long Term Contract and Short Term Contract
| S/NO | LONG TERM CONTRACT | SHORT TERM CONTRACT |
| A long-term contract is an agreement when an agency and a client have some serious projects to work on. | A short-term contract is one where the parties agree in advance that they will not be bound by considerations of fairness or good faith if they negotiate a future contract. | |
| A long-term contract allows you to provide your client with more direction and figure out a long-term plan to make sure the project is sustainable. | A shorter contract adds pressure as a client will want to see results immediately, and it may be difficult for them to see the bigger picture. | |
| The supplier benefits from a long-term contract because he saves informational rents | the supply chain profit increases under short-term contracts, because the renegotiation at the beginning of the second period allows the elimination of the inefficiency generated under the classical menu of contracts | |
| The buyer’s informational rents reduces under long-term contracting | The buyer’s informational rents increase under short-term contracting | |
| Payoff difference is substantial in the short-term contract but marginal under the long-term contract. | Payoff difference is marginal under the long-term contract. | |
| Long term contract is built around long term goals with large budget and time scale | Built around short terms goals that are limited by budget and timescale. | |
| Short-term contract typically describes a term of 1-2 years, sometimes up to 5 years. | A long-term contract can be 10, 20, or 50 years and above. | |
| A long-term contract that mandates trade in both periods is disadvantageous since renegotiation is required if there are no gains from trade in the second period. | A short-term contract is disadvantageous since a new contract must be negotiated if gains from trade exist in the second period. |
References
Masten, Scott E. 2009. “Long-Term Contracts and Short-Term Commitment: Price Determination for Heterogeneous Freight Transactions.” American Law and Economics Review 11(1):79-111.
In a Tabular Form Differentiate Between Long Term Contract and Short Term Contract
Segal, Ilya. 1999. “Complexity and Renegotiation: A Foundation for Incomplete Contracts.” Review of Economic Studies 66:57-82.
