Bloomberg... Harvard University’s Oliver Hart and Bengt Holmstroem of the Massachusetts Institute of Technology were awarded the 2016 Nobel Prize in Economics for their work on contract theory and its role in shaping everything from executive pay to public sector privatizations.
Work by Holmstroem, 67, in the 1970s, and by the 68-year-old Hart in the 1980s, helped launch contract theory “as a fertile field of basic research,” the Royal Swedish Academy of Sciences said in a statement on Monday.
“Modern economies are held together by innumerable contracts,” the academy said. “The new theoretical tools created by Hart and Holmstroem are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design.”
Hart has focused his research on the division of power in economic relationships, including in contracts. He’s also explored the effects that such divisions of power have on corporate structure and finance.
Fellow Harvard professor Dale W. Jorgenson said in 1997 that Hart’s work “revolutionized the field of corporate finance.”
A British-born U.S. citizen, Hart received a bachelor’s degree in mathematics from Cambridge University’s King’s College in 1969, a master’s in economics from University of Warwick in 1972 and a doctorate from Princeton University in 1974.
He joined Harvard in 1993 and was chairman of the economics department from 2000 to 2003.
Holmstroem has focused his research on company organization, particularly on contracts and incentives, including corporate governance, executive compensation and restructuring.
He also helped develop the theory of moral hazard, the notion that banks and other economic agents take unwarranted risks because they know they won’t face the full cost of failure.
His recent work has concentrated on liquidity problems and financial markets. He has argued that “ignorance is bliss” at times during financial crises, allowing markets to remain liquid as banks and other participants continue to trade with each other in spite of the troubles each might face.
Holmstroem, who was born in Finland, received a bachelor’s degree in mathematics and physics from the University of Helsinki in 1972, a master’s degree in operations research from Stanford University in 1975 and a doctorate in business, also from Stanford, in 1978.
Holmstroem joined MIT in 1994 and was chairman of its economics department from 2003 to 2006. He served on the board of Finnish mobile phone maker Nokia Corp. from 1999 to 2012.
Annual prizes for achievements in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel, the Swedish inventor of dynamite, who died in 1896. The prize in economic sciences was added by Sweden’s central bank in 1968. The total amount for each prize is 8 million kronor ($926,000).
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, Paul Krugman and Friedrich August von Hayek. Before it's here, it's on the Bloomberg Terminal. LEARN MORE