Two US-based economists of European origin, UK born Oliver Hart and Finland born Bengt Holmstrom, have been awarded this year’s Nobel Prize for Economics.
The duo has been recognised for their contribution to the field of contract theory, which has, among other things, furthered the understanding of issues related to performance based pay of top executives.
While Hart is a professor of economics at the Harvard University, Holmstrom teaches economics and management at the Massachusetts Institute of Technology (MIT).
The Royal Swedish Academy of Sciences, which awards the Economics prize said that their work “lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.”
Basically speaking, their work is concerned with balancing the demands and the needs of companies and organisations that enter into contracts.
“Hart’s findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law. His research provides us with new theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and when institutions such as schools or prisons ought to be privately or publicly owned,” the academy said in a statement.
“Through their initial contributions, Hart and Holmström launched contract theory as a fertile field of basic research. Over the last few decades, they have also explored many of its applications. Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions,” the statement went on to add.
Separately, the academy also explained how Holmstrom’s work helped further research into executive pay. “A central result, published separately and independently by Bengt Holmström and Steven Shavell in 1979, is that an optimal contract should link payment to all outcomes that can potentially provide information about actions that have been taken. This informativeness principle does not merely say that payments should depend on outcomes that can be affected by agents,” it said in a detailed statement.
Among the probables for this year’s Nobel prize for economics was Avinash Dixit, an Indian origin economist who teaches at Princeton University and has authored papers on game theory, economic policy and international trade.
The economics prize was added to the Nobel list in 1968. On Thursday, the Nobel prize for literature will be announced, completing this year’s awards. The Nobel peace prize and those for medicine, physics and chemistry were announced last week.
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