ZME Science
No Result
View All Result
ZME Science
No Result
View All Result
ZME Science

Home → Science

The 2016 Nobel Prize in economics awarded to duo of contract theoreticians

Sign at the bottom for Prize.

Alexandru MicubyAlexandru Micu
October 10, 2016
in Science
A A
Share on FacebookShare on TwitterSubmit to Reddit

The 2016 Nobel Prize for economics goes to UK-born Oliver Hart from Harvard University and Finland-born Bengt Holmström from MIT for their work on contract theory. The duo has covered issues ranging from employer-employee contracts to public-private partnerships and executive pay. Their work has helped improve the design of contracts, which hold together modern economies.

The committee said the prize reflected the pair’s role in advancing contract theory as “fertile field of basic research” and their subsequent work, which many regard as the foundation on which many policies and institutions were created. The Royal Swedish Academy of Sciences called their work the key to understanding how real-life institutions and contracts sustain modern economies.

BREAKING 2016 Prize in Economic Sci. to Oliver Hart @Harvard & Bengt Holmström @MIT “for their contributions to contract theory” #NobelPrize pic.twitter.com/xosZ27WVee

— The Nobel Prize (@NobelPrize) October 10, 2016

“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 focused on contract theory. In his view, contracts work as instruction manuals, but they were incomplete. His assessment of the US prison system, showing that the pressure to cut costs was so great it led to unacceptable drops in quality, found that the issue stems from “incomplete contracts”. As these agreements can’t specify what needs be done in every case, they should say how decisions should be taken.

“His research provides us with theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and which institutions such as schools or prisons ought to be privately or publicly owned,” the Royal Swedish Academy of Sciences, which awarded the prize, said in a news release, referring to Dr. Hart.

Holmström’s work has focused on employment contracts, reaching into issues such as executive pay. In the news conference that marked the award, he was asked what the thought of the huge bonuses awarded under modern contracts.

“My personal view is they are too complicated today,” he said.

Where a company wants its employers to act as if they have a stake in the winnings — working hard, minding costs but also taking calculated risks — employees don’t. They want to be paid as much as possible, for as long as possible, while not working harder than needed, and assessing performance becomes difficult. So Holmström showed that companies should pay employees following the broadest possible evaluation of his or her performance.

He said one big part of this is to set aside a portion of compensation. If an employee is efficient and the company profits, this bonus can be increased. If not, it can be reduced. He also said that companies should tie pay to the share price of other firms in the industry — it wouldn’t make sense to reward or punish executives for fluctuations tied to broader economic factors. And, companies are increasingly opting for this kind of deferred payment, particularly for executives, Dr. Holmstrom noted with satisfaction Monday morning.

RelatedPosts

Nobel Prize: Trio of scientists honored for discovering Hepatitis C virus
Chinese disident wins Nobel Peace Prize
The 2016 Nobel Prize in chemistry awarded to trio of molecular machine pioneers
Nobel Prize in Chemistry awarded to trio that created today’s lithium-ion batteries

 

 

Tags: economicsNobel

ShareTweetShare
Alexandru Micu

Alexandru Micu

Stunningly charming pun connoisseur, I have been fascinated by the world around me since I first laid eyes on it. Always curious, I'm just having a little fun with some very serious science.

Related Posts

Economics

Google searches for “recession” are surging. How worried should you be?

byMihai Andrei
3 months ago
News

NASA made $76 billion for the US economy in 2023, three times more than its budget

byTibi Puiu
8 months ago
News

The Nobel Prizes this year are an AI bonanza

byMihai Andrei
8 months ago
Economics

What we can learn from the biggest corporate tax cut in modern times

byMihai Andrei
9 months ago

Recent news

AI-Based Method Restores Priceless Renaissance Art in Under 4 Hours Rather Than Months

June 13, 2025

Meet the Dragon Prince: The Closest Known Ancestor to T-Rex

June 13, 2025

Your Breathing Is Unique and Can Be Used to ID You Like a Fingerprint

June 13, 2025
  • About
  • Advertise
  • Editorial Policy
  • Privacy Policy and Terms of Use
  • How we review products
  • Contact

© 2007-2025 ZME Science - Not exactly rocket science. All Rights Reserved.

No Result
View All Result
  • Science News
  • Environment
  • Health
  • Space
  • Future
  • Features
    • Natural Sciences
    • Physics
      • Matter and Energy
      • Quantum Mechanics
      • Thermodynamics
    • Chemistry
      • Periodic Table
      • Applied Chemistry
      • Materials
      • Physical Chemistry
    • Biology
      • Anatomy
      • Biochemistry
      • Ecology
      • Genetics
      • Microbiology
      • Plants and Fungi
    • Geology and Paleontology
      • Planet Earth
      • Earth Dynamics
      • Rocks and Minerals
      • Volcanoes
      • Dinosaurs
      • Fossils
    • Animals
      • Mammals
      • Birds
      • Fish
      • Amphibians
      • Reptiles
      • Invertebrates
      • Pets
      • Conservation
      • Animal facts
    • Climate and Weather
      • Climate change
      • Weather and atmosphere
    • Health
      • Drugs
      • Diseases and Conditions
      • Human Body
      • Mind and Brain
      • Food and Nutrition
      • Wellness
    • History and Humanities
      • Anthropology
      • Archaeology
      • History
      • Economics
      • People
      • Sociology
    • Space & Astronomy
      • The Solar System
      • Sun
      • The Moon
      • Planets
      • Asteroids, meteors & comets
      • Astronomy
      • Astrophysics
      • Cosmology
      • Exoplanets & Alien Life
      • Spaceflight and Exploration
    • Technology
      • Computer Science & IT
      • Engineering
      • Inventions
      • Sustainability
      • Renewable Energy
      • Green Living
    • Culture
    • Resources
  • Videos
  • Reviews
  • About Us
    • About
    • The Team
    • Advertise
    • Contribute
    • Editorial policy
    • Privacy Policy
    • Contact

© 2007-2025 ZME Science - Not exactly rocket science. All Rights Reserved.