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Continuing Contracts

Author

Listed:
  • Maija Halonen-Akatwijuka
  • Oliver Hart

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.

Suggested Citation

  • Maija Halonen-Akatwijuka & Oliver Hart, 2015. "Continuing Contracts," Bristol Economics Discussion Papers 15/665, Department of Economics, University of Bristol, UK, revised 12 Oct 2016.
  • Handle: RePEc:bri:uobdis:15/665
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    References listed on IDEAS

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    More about this item

    Keywords

    Short-term; Long-term; Continuing contracts; Fairness; Good faith bargaining; For-cause; At-will;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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