Contract theory wins duo Nobel Prize

Nobel laureates Bengt Holmstrom (left, above) and Oliver Hart, whose "new theoretical tools... are valuable to the understanding of real-life contracts and institutions".
Nobel laureates Bengt Holmstrom (above) and Oliver Hart, whose "new theoretical tools... are valuable to the understanding of real-life contracts and institutions".
Nobel laureates Bengt Holmstrom (left, above) and Oliver Hart, whose "new theoretical tools... are valuable to the understanding of real-life contracts and institutions".
Nobel laureates Bengt Holmstrom and Oliver Hart (above), whose "new theoretical tools... are valuable to the understanding of real-life contracts and institutions".

STOCKHOLM • British-born Oliver Hart and Finnish-born Bengt Holmstrom have won the 2016 Nobel Prize in economics for their contributions to contract theory, boosting the understanding of issues such as performance-based pay for top executives.

"(Their work) lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions," the Royal Swedish Academy of Sciences said yesterday in announcing the 8 million Swedish crown (S$1.26 million) prize.

Professor Hart's work has helped in understanding which companies should merge and the right mix of financing, and when institutions such as schools should be privately or publicly owned, the academy said in a statement.

"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," it said.

"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."

Born in Britain in 1948 and now a US citizen, Prof Hart received a bachelor's degree in mathematics from Cambridge University's King's College in 1969, a master's degree in economics from the University of Warwick in 1972 and a doctorate from Princeton University in 1974.

He joined Harvard in 1993 and was chairman of its economics department from 2000 to 2003.

"I woke at about 4.40 and was wondering whether it was getting too late for it to be this year, but then fortunately the phone rang," Prof Hart was quoted as saying on the official Twitter account of the Nobel Prize.

"My first action was to hug my wife, wake up my younger son."

Professor Holmstrom is a US permanent resident who was born in Finland in 1949. He received a bachelor's degree in mathematics and physics from the University of Helsinki in 1972, a master's in operations research from Stanford University in 1975 and a doctorate in business, also from Stanford, in 1978.

Prof Holmstrom joined the Massachusetts Institute of Technology in 1994 and was chairman of its economics department from 2003 to 2006. He also served on the board of Finnish mobile phone maker Nokia from 1999 to 2012.

Economics is the fifth of this year's Nobels. The prizes for physiology or medicine, physics, chemistry and peace were awarded last week. The literature prize is due to be announced on Thursday.

REUTERS, AGENCE FRANCE-PRESSE, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 11, 2016, with the headline 'Contract theory wins duo Nobel Prize'. Print Edition | Subscribe