The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to Oliver Hart, Harvard University, Cambridge, MA, USA and Bengt Holmström, Massachusetts Institute of Technology, Cambridge, MA, USA “for their contributions to contract theory”. British-born Oliver Hart and Bengt Holmstrom of Finland won the Nobel Memorial Prize in Economic Sciences for their contributions to contract theory, shedding light on how contracts help people deal with conflicting interests.
Their findings on contract theory have implications in such areas as corporate governance, bankruptcy law and political constitutions, said the Royal Swedish Academy of Sciences, which announced the 8 million Swedish crown ($928,000) prize.
“This theory has really been incredibly important, not just for economics, but also for other social sciences,” said Per Stromberg, a member of the prize committee and professor at the Stockholm School of Economics.
Contract theory considers, for example, whether managers should get paid bonuses or stock options, or whether teachers or healthcare workers should be paid fixed rates or by performance-based criteria. In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics.
Last year’s award went to Angus Deaton of Princeton University, who won recognition for his analysis of consumption, poverty and welfare. The prestige of getting a Nobel has helped previous winners bring their economic theories closer to policy making. Past laureates include Milton Friedman, James Tobin and Friedrich August von Hayek.