The Nobel prize in economics has been awarded to British-born Oliver Hart and Bengt Holmstrom of Finland for their research on how contracts are used to help people reconcile conflicting interests, such as in the pay of CEOs or privatization of services.
Hart is an American citizen currently working at Harvard University while Holmstrom is at the Massachusetts Institute of Technology.
Here is a look at the importance of their work.
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SIGNIFICANCE OF THE PRIZE
The Royal Swedish Academy of Sciences says that “the new theoretical tools created by Hart and Holmstrom are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design.”
Hart is credited with contributing to a branch of contract theory in the mid-1980s that provided a new way to analyze questions about company mergers, the proper mix of financing for deals, and whether institutions like schools or prisons should be privately or publicly owned.
Holmstrom is credited with work in the 1970s that showed how contracts should link pay to performance in a way that weights both risks and incentives.
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REACTION
Holmstrom told reporters by telephone that he felt grateful for the award. “I certainly did not expect it, at least at this time, so I was very surprised and very happy, of course,” he said.
Leonardo Felli, head of the Department of Economics at London School of Economics, where Hart is a visiting professor, said the winners’ “analysis of the contractual relationship between individuals has enhanced our understanding of the inner functioning of modern firms, corporations and organizations.”
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PRIZE
The award comes with an 8 million kronor ($930,000) check, to be divided between the winners, in addition to a medal and a diploma that will be handed out at the Nobel ceremonies in December.