Harvard, MIT Professors Win Nobel Prize in Economic Sciences

CAMBRIDGE, MA — It's a call best taken with a strong cup of coffee.

The Nobel Prize committee telephoned before 5 a.m. Monday with news worth waking up for: two Cambridge professors are co-recipients of the 2016 Nobel Prize in Economic Sciences, awarded for their contributions to contract theory.

Harvard University’s Oliver Hart and MIT's Bengt Holmström will share the Sveriges Riksbank Prize in Economic Sciences and split the the 8 million Swedish krona prize.

Hart said in a Nobel interview he woke up at 4:40 a.m., "wondering whether it was getting too late for it to be this year."

"Then, fortunately, the phone rang," the told them.

Hart was born in London and received his Ph.D. from Princeton University. He is the Andrew E. Furer Professor of Economics at Harvard. Holmström hails from Helsinki, Finland, and received his Ph.D. from Stanford University. He is the Paul A. Samuelson Professor of Economics and Professor of Economics and Management at MIT.

What Hart and Holmström provide is theoretical tools for thinking about contracts in a modern economy.

As Holmström explained in a Nobel press conference, those tools are especially applicable on two fronts.

First, it is helpful in thinking through companies' incentive and bonus structure. With CEOs, for example, the balance of bonuses and other pay increases is to encourage better performance, and not motivate wrongdoing, he said.

Contract theory serves "not just to explain what happens, but also to help shareholders and corporate boards to sign better contracts," he said.

It's work Holmström has been doing since the late 1970s, when he developed his "informativeness principle," which "stated precisely how this contract should link the agent’s pay to performance-relevant information," according to a Royal Academy press release.

Hart, likewise, has been at this since the mid-1980s, exploring the limitations of contracts over time. That includes assessing which kinds of companies should merge or the proper mix of debt and equity financing.

Additionally, Hart has assessed the impacts of certain kinds of ownership, weighing whether it matters if a public service, such as a school or prison, is provided by the government versus a private contractor.

Together, the two men are credited with "launch(ing) contract theory as a fertile field of basic research," according to the Academy press release.

"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 Academy declared.

Photo by Jonathunder used under public domain