Continuing Contracts

Maija Halonen-Akatwijuka and Oliver Hart

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: Parties often regulate their relationships through “continuing” contracts that are neither long-term nor short-term but usually roll over: a leading example is a standard employment contract. We argue that what distinguishes a continuing contract from a short-term (or fixed-term) contract is that parties apply notions of fairness, fair dealing, and good faith as they revise the terms of the contract: specifically, they use the previous contract as a reference point. We show that a continuing contract can reduce (re)negotiation costs relative to a short-term or long-term contract when there is uncertainty about future gains from trade. However, fair dealing may limit the use of outside options in bargaining and as a result parties will sometimes fail to trade when this is efficient. For-cause contracts, where termination can occur only for a good reason, can reduce this inefficiency.

Keywords: Short-term; Long-term; Continuing contracts; Fairness; Good faith bargaining; For-cause; At-will (search for similar items in EconPapers)
JEL-codes: D23 D86 K12 (search for similar items in EconPapers)
Pages: 33 pages.
Date: 2015-08-26, Revised 2016-10-12
New Economics Papers: this item is included in nep-cta, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Continuing Contracts (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:15/665

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