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Economics Nobel goes to American-based professors for contract theory

Sahil Bhalla | Updated on: 10 October 2016, 18:07 IST

Two US-based professors, Oliver Hart from the United Kingdom and teaching at Harvard University and Bengt Holmstroem teaching at Massachusetts Institute of Technology (MIT) have been awarded the 2016 Nobel Prize in Economic Sciences for their work on "contract theory".

They were awarded the prize for their insights into how to best write contracts between employers and employees or between companies and customers. The two laureates will split the 8 million Swedish kronor (Rs 6.1 crore) prize funded by the Swedish central bank.

JONATHAN NACKSTRAND/AFP

"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 told the Academy, "My first action was to hug my wife, wake up my younger son... and I actually spoke to my fellow Laureate."

This is the fifth Nobel prize to be announced this year after medicine, physics, chemistry and peace but, as well all know, this isn't a real Nobel prize. The prize is named after the central bank of Sweden - Sveriges Riksbank. The Nobel Foundation isn't funding the award, the bank is. The Nobel Foundation doesn't even choose the winner.

Contract theory

"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," the Royal Swedish Academy of Sciences said in a statement. Contract theory is a 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".

"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."

Holmstroem's work in the 1970s focused on company organisation. Particularly, his research centered on contracts and incentives that included executive compensation, corporate governance and restructuring.

Hart followed with his work in the 1980s. His researched focused 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," Jonas Bergman reports in Bloomberg.

Who are the winners?

Holmstroem was born in Finland and received a bachelor's degree in mathematics and physics from the University of Helsinki in 1972. Thereafter he completed his master's degree in operations research in 1975 from Stamford University. He completed a doctorate in business in 1978 from the same university.

He joined MIT in 1994 and was the chairman of the economics department from 2003 to 2006 . Interestingly, he was on the board of the famous Finnish mobile phone maker Nokia Corp from 1999 to 2012.

"He is an elected fellow of the American Academy of Arts and Sciences, the Econometric Society and the American Finance Association, and an elected foreign member of the Royal Swedish Academy of Sciences and the Finnish Academy of Sciences and Letters," reads his MIT bio.

Hart, on the other hand, was born in Britain and is now a US citizen. Hart did his bachelor's degree in mathematics from King's College, part of Cambridge University, in 1969. He then went to the University of Warwick for his master's degree and finished that in 1972. Finally, he got a doctorate from Prince University in 1974.

In 1993, Hart joined Harvard University. For a period of three years from 2000-2003 he was the chairman of the economics department. Hart has even published a book - Firms, Contracts, and Financial Structure in 1995 - on his Nobel winning work and many journal articles.

Last year's winners

The Nobel prize in economics sciences went to Angus Deaton, professor Woodrow Wilson School at Princeton University. He won the prize for "improving the data that shape public policy, including measures of wealth and poverty, savings and consumption, health and happiness".

The next and final Nobel prize will be the Nobel Prize in Literature. That will be announced on Thursday, 13 October at 1 PM local time (4:30 PM IST).

First published: 10 October 2016, 18:07 IST
 
Sahil Bhalla @IMSahilBhalla

Sahil is a correspondent at Catch. A gadget freak, he loves offering free tech support to family and friends. He studied at Sarah Lawrence College, New York and worked previously for Scroll. He selectively boycotts fast food chains, worries about Arsenal, and travels whenever and wherever he can. Sahil is an unapologetic foodie and a film aficionado.

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