Economics Nobel Prize winners: Oliver Hart and Bengt Holmström
What's the story
The 2016 Nobel Memorial Prize in Economic Sciences has been awarded to the 68-year-old British economist and Harvard Professor Oliver Hart and 67-year-old Finnish economist and MIT Professor Bengt Holmström. They had worked on contract theory covering a range of subjects from public-private partnerships to CEO's pay. They have been announced as the winners by the Royal Academy of Sciences in Sweden's capital, Stockholm.
Introduction
About the Nobel Prize in Economics
The Nobel Prize, first awarded in 1901, is given for outstanding contributions in the fields of Chemistry, Literature, Physics, Peace, and Physiology/Medicine. The Nobel Prize in Economics, officially called "Sveriges Riksbank Prize in Economic Sciences", wasn't initially part of the Nobel Prize. It wasn't mentioned in Alfred Nobel's 1895 will; it was introduced in 1968 to mark the 300th anniversary of Sweden's central bank.
Contenders
Top contenders for 2016 Prize
The nomination to the Nobel Prize in Economic Sciences is by Economic Sciences Prize Committee's invitation only. The information on the nominees and nominations cannot be revealed until 50 years later. However, this year's possible contenders included American economist and Stanford Professor Edward Lazear, former IMF Chief Economist Olivier Blanchard, Harvard University's Marc Melitz, and the World Bank's new Chief Economist Paul Romer.
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A comprehensive framework
The prize givers said: "This year's laureates have developed contract theory - a comprehensive framework for analyzing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatization of public-sector activities."
Contract Theory
'Key' to understanding the real-life contracts and institutions
The Royal Swedish Academy of Sciences described the duo's work as 'key' to understanding the real-life contracts and institutions, which hold modern economies together. Holmström said he was "very lucky and grateful" as the prize was completely unexpected; Hart, however, had been a little more expectant. The award reflected the pair's work in launching contract theory as a "fertile field of basic research."
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Royal Swedish Academy of Sciences' statement
"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 designed to ensure that the parties take mutually beneficial decisions."
Hart-Holmström
Pressure to cut costs leads to unacceptable drop in quality
Hart and Holmström were praised and congratulated by fellow economists; however, the duo wasn't seen as front-runners for the prize. Hart's research included an assessment of the US' private prisons; his research showed the pressure to cut costs led to an "unacceptable drop in quality," and explained about incomplete contracts that aren't detailed enough. Holmström is known for his pioneering research on executive pay.