Oliver Hart And Bengt Holmstrom Take The Nobel Prize In Economics For Their Work On Contracts 

The Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Sciences on Monday (10 October) to Oliver Hart and Bengt Holmstrom “for their contributions to contract theory”, as stated in the press release.

Hart is a professor at Harvard University while Holmstrom is a professor at Massachusetts Institute of Technology. The two have have “sought to determine how contracts can encourage mutually beneficial behavior,” as reported in The New York Times.

“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,” said the press release.

Contracts are what essentially bind modern economies. They are the basis for a relationship, say, between employers and employees and between companies and their customers. Since such relationships typically involve conflicts of interest, contracts must be designed in such a way that all parties concerned take decisions that are beneficial for everyone involved.

Hart’s and Holmstrom’s work has helped improve the design of such contracts. While Holmstrom’s work has focused on employment contracts, Hart’s work has dealt more with making contracts stipulate how decisions should be made rather than the impossible task of telling what should be done in every case.