A theory of contracts: awarded the prize in Economics in memory of Nobel – TASS

Award 2016 State Bank of Sweden’s Economics in memory of Alfred Nobel went to Oliver HART and Bengt Holmstrom for contribution to the development of the theory of contracts. On Monday announced the Nobel Committee at the Royal Academy of Sciences of Sweden.

As reported in the official press release, HART and Khol’mstrem created new theoretical tools in the field of real evaluation of contracts between participants of business processes that allows to identify pitfalls of the contracts.

What is contract theory

the Theory of contracts, founded by the winners, develops the theme of management of the company with the possibility of the presence of conditions of asymmetry of information.

we are talking about the phenomenon in the present business environment, when the company’s management, investors and direct performers of different aware of the market situation and risks incurred by the firm.

What is known about Bengt Holmstrom

Bengt Robert Khol’mstrem was born 18 April 1949. A bachelor’s degree in mathematics received at the University of Helsinki in 1972, a master’s degree in the field of operations research in 1975 at Stanford University (Palo Alto, California, USA).

In 1978 at Stanford graduate school of business, defended his doctoral dissertation (Ph. D.). Worked at various American universities, was a member of the Board of Directors in the Finnish Kuusakoski corporations, and Nokia. He is currently a Professor at the Massachusetts Institute of technology (USA).

What are his achievements

In the end 1970s Khol’mstrem developed the principle of optimal interaction between shareholders, management and contractors when working with contracts. He demonstrated how the principals (e.g. shareholders) of the company can be the optimal contract with the agent (Manager, CEO), whose actions are partially outside the field of view of shareholders.

the Principle of informativeness Holmstrom exactly links the paying agent with information regarding the performance.

What is known about Oliver HART

Oliver Simon D’arcy HART was born on 9 October 1948 in London. In 1969 he received a bachelor’s degree in mathematics at king’s College (Cambridge, UK), in 1972 — master degree in Economics from Warwick University (Coventry, UK), in 1974 — a doctoral degree (Ph. D.) at Princeton University (new Jersey, USA).

currently working at Harvard University (Cambridge, Massachusetts, USA).

What are his achievements

In the mid-1980s, Oliver HART, have developed a new part of the contract theory — theories of so-called incomplete contracts where not all the terms of the agreement is verifiable, that is, cannot be written into the contract.

the Main idea HART was the fact that the parties in the contract should not be explicitly defined, and under what circumstances they should do in the future. Instead, the contract should prescribe the procedure for the resolution of disputes.

based On the theory of incomplete contracts in the mid-1990s, years HART has created a full-fledged theory of the firm.

Who else could get the reward

Previously, the Agency Thomson Reuters has presented its forecasts for the candidates for the award, and none of them came true.

the Agency pointed to the American economist Edward Lasira and his work in the field of new models of employee motivation, the former chief economist of the International monetary Fund, Frenchman Olivier Blanchard (for contributions to macroeconomic theory). The third applicant was named a Harvard University Professor mark Melitz, who has conducted research in the area of international trade.