Final answer:
An increase in marginal benefit may lead to either an increase or a decrease in the optimal contract length, depending on whether the benefits continue to outweigh the associated costs and other market or operational factors.
Step-by-step explanation:
An increase in the marginal benefit arising from a specialized investment can cause the optimal contract length to either increase or decrease. If the marginal benefit of a specialized investment rises, the contracting lengths may become longer to capitalize on increased productivity, assuming that the marginal benefits continue to outweigh the costs associated with longer contracts.
However, real-world scenarios might show different results as firms may adjust contract length based on other operational or market considerations. For instance, if increased marginal benefits arise from technological advancements that also increase the speed of obsolescence, shorter contracts may be preferred to adapt rapidly to changing market conditions. Additionally, if the market dynamics suggest that there will be larger gains from frequent renegotiation, this could also lead to shorter optimal contract lengths.