Continuing Contracts

32 Pages Posted: 3 Sep 2016

See all articles by Maija Halonen-Akatwijuka

Maija Halonen-Akatwijuka

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: August 25, 2016

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

JEL Classification: D23, D86, K12

Suggested Citation

Halonen-Akatwijuka, Maija and Hart, Oliver D., Continuing Contracts (August 25, 2016). Available at SSRN: https://ssrn.com/abstract=2833362 or http://dx.doi.org/10.2139/ssrn.2833362

Maija Halonen-Akatwijuka

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO) ( email )

Mary Paley Building
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Bristol BS8 1TN
United Kingdom
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Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States
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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

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