This year’s 2016 Nobel Prize in Economics has been awarded to Oliver Hart and Bengt Holmström for their work on contract theory, which has covered a range of issues from public-private partnerships to executive pay.
Their research was praised for shedding light on how contracts help people deal with conflicting interests in areas such as insurance and employment. They were also recognised for helping with the design of better contracts, “thereby shaping better institutions in society”.
As it announced the prize, the Royal Swedish Academy of Sciences described the pair’s work as key to the understanding of the real-life contracts and institutions that hold together modern economies.
Holmström, now working at the Massachusetts Institute of Technology, and Hart, of Harvard University, were praised and congratulated by fellow economists, although they had not been seen as frontrunners for the honour, officially known as the Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel.
Holmström said he certainly had not expected the 8m Swedish krona (£746,000) prize and described himself as “very lucky and grateful”.
“This year’s laureates have developed contract theory, a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.”
Hart’s research work has included a damning assessment of America’s private prisons. He showed that the pressure to cut costs was too great, leading to an unacceptable drop in quality. At the core is the issue of “incomplete contracts” – the fact that contracts are not detailed enough to cover every small point.
Holmström is known for pioneering research into executive pay. His work on employment contracts has considered a range of professions from teaching to management and whether they should be paid fixed salaries or work on the basis of performance-related pay.
Source: The Guardian UK
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