Continuing Contracts

Parties often regulate their relationships through “continuing” contracts that are not fixed term but roll over: employment is a leading example.  Our premise is that parties apply fairness when they revise a continuing contract and that prior terms, together with market information, will be a reference point.  A continuing contract can reduce (re)negotiation costs relative to a short-term or long-term contract.  However, fair bargaining makes adjusting to outside options difficult and may cause inefficient outcomes.  An implicit promise of a long-term relationship, as in employment, can improve matters.