Harvard professor Oliver Hart and MIT’s Bengt Holmstrom were awarded Monday the 2016 Nobel Memorial Prize in Economic Sciences for their work on contract theory, the study of how people can efficiently enter into agreements. Their contributions have shaped the thinking in a wide range of fields, from law, to economics to political science.
British-born Hart, 68, teaches economics at Harvard, while Finnish-born Holmstrom, 67, teaches at MIT. They will share the prize, and split the 8 million Swedish krona award — about $925,000.
“Oliver Hart, I’m so glad that I won it with him. He’s my closest friend here,” Holmstrom said to reporters shortly after learning of the Nobel decision.
Holmstrom’s work explores how best to monitor and reward people for doing their jobs. Paying for performance does not always encourage employees to work their hardest, particularly when managers often cannot completely keep track of what everyone is doing, his findings suggest. Holmstrom’s theories illustrate how in some situations, it makes sense to offer people fixed salaries, instead of variable bonuses tied to results of their work.
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Hart has investigated how best to write contracts when some of the possible outcomes are hazy. This is one of the central questions when governments decide to privatize their duties by hiring outside companies. Hart’s research shows that these companies often face strong incentives to cut corners, complicating the idea that the private market is always more efficient.
“When you start thinking about it contracts are really fundamental,” Per Stromberg, chairman of the Economic Sciences Prize Committee, said. “We see them everywhere in society. All of us are engaged in different types of contracts.”
“This is a theory that has really has given rise to lots of other applications,” he added. “In many many fields, not just in economics but in law and politics, people actually use these theories to understand what they’re studying.”
Last year, the prize went to Princeton economist Angus Deaton for research on how people, particularly the poor, make decisions about spending money.