Two professors from Harvard and MIT have been awarded the Nobel Prize in economics for contributions to contract theory -- the agreements that shape business, finance and public policy.
Oliver Hart, 68, a British economist teaching at Harvard, and Bengt Holmström, 67, a Finnish economist teaching at MIT, were announced as the winners Monday by the Royal Academy of Sciences in Stockholm, Sweden.
"Contracts are essential to the functioning of modern societies," the academy said in its announcement. "Hart's and Holmström's research sheds light on how contracts help us deal with conflicting interests."
What they won for
Among the contracts they have studied is Holmström's research on employment contracts, including between CEOs and shareholders.
"In economics we don't really take a stand on the size of the bonus, though they seem extraordinarily high," Holmström told reporters when asked about the multi-million-dollar bonuses paid to modern CEOs.
Hart's research has looked at whether providers of public services, such as schools, hospitals, or prisons, should be publicly or privately owned. The research showed that "incentives for cost reduction are typically too strong," the academy said. Privatizing those types of services can lead to a reduction in quality greater than the advantages of cost savings.
