Stockholm – Work on contract theory – an area which affects “all of us in society” – earned US-based economists Oliver Hart and Bengt Holmstrom the 2016 Nobel Prize in Economic Sciences, the Royal Swedish Academy of Sciences announced Monday.
British-born Hart has worked in the United States since the 1980s, and is currently a professor at Harvard University.
Holmstrom, a Finn, is a professor at the Massachusetts Institute of Technology (MIT) in the United States.
Contracts affect “all of us in society,” said Per Stromberg, the chairman of the Nobel Sciences Prize Committee, citing insurance, employment and sales contracts as examples.
The theories that Hart and Holmstrom developed are “incredibly important for us to understand these kinds of contracts and institutions,” Stromberg explained at a press conference.
The theories of Hart and Holmstrom also help identify “potential pitfalls in contract design,” the academy said in a statement.
Holmstrom said he was delighted at winning the award.
“I was dazed, like most prize winners, very surprised and very happy,” he said, speaking by telephone to reporters at the Royal Swedish Academy of Sciences.
Holmstrom’s work has demonstrated how the best contracts weigh risks against incentives, the academy said. He then applied that theory to more realistic settings, including job promotion or free-riding in the workplace.
Hart said he hugged his wife on learning of his win.
“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,” Hart says on Twitter.
“My first action was to hug my wife, wake up my younger son … and I actually spoke to my fellow Laureate [Bengt Holmstrom],” he adds.
Hart’s research has focused on dealing with events that are not specified in contracts, or so-called “incomplete contracts.”
“Hart’s findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law,” the academy said.
With the exception of economics, the prizes were endowed by Swedish industrialist Alfred Nobel (1833-96), the inventor of dynamite.
The economics prize, which was not one of the original prizes mentioned in Nobel’s will, is formally called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It was set up and funded by the Swedish central bank and first awarded in 1969.
It is worth 8 million kronor (930,000 dollars), the same as the other Nobel prizes.
Last year, Scottish-American economist Angus Deaton received the reward for his work exploring the interrelationship of consumption, poverty and welfare.
– dpa
