“The Prize in Economic Sciences 2016” http://www.kva.se/en/pressroom/2016/the-prize-in-economic-sciences-2016/
Katie Allen and Graeme Wearden “Nobel economics prize won by Oliver Hart and Bengt Holmström” https://www.theguardian.com/world/2016/oct/10/nobel-economics-prize-won-by-oliver-hart-and-bengt-holmstrom
The prize givers said the award reflected the pair’s role in launching contract theory as a “fertile field of basic research” and their subsequent work that has helped lay a foundation for designing policies and institutions in areas from bankruptcy legislation to political constitutions.
“Society’s many contractual relationships include those between shareholders and top executive management, an insurance company and car owners, or a public authority and its suppliers. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions,” the Royal Swedish Academy of Sciences said.
“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.”
Hart’s research work has included a damning assessment of America’s private prisons. He showed that the pressure to cut costs was too great, leading to an unacceptable drop in quality. At the core is the issue of “incomplete contracts” – the fact that contracts are not detailed enough to cover every small point.
Holmström is known for pioneering research into executive pay. In a news conference to mark the Nobel award, Holmström was asked what he made of large bonuses awarded under modern-day contracts. “My personal view is they are too complicated today,” he said.