Economists share Nobel Prize for contract theory

The 2016 Nobel Prize in Economics has been won by Harvard University's Oliver Hart and Bengt Holmstrom of the Massachusetts Institute of Technology for their contributions to contract theory and its part in binding employers and workers, and companies with customers.

The economists’ work helped to launch contract theory “as a fertile field of basic research,” according to the Royal Swedish Academy of Sciences.

“The work lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions,” the academy said shortly after announcing the eight million Swedish crown ($928,000) award.

British-born Oliver Hart is an economics professor at Harvard University. Finnish-born Bengt Holmstrom is professor of economics and management at the Massachusetts Institute of Technology.

According to the academy, Hart's work is focused on the right combination of financing and helps us understand which companies should merge, as well as when institutions should be privately or publicly owned.

Holmstrom's work is devoted to the order of formulating contracts for executives.

“The new theoretical tools created by Hart and Holmstrom are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design,” the academy said, stressing that modern economies were held together by innumerable contracts.

The prize in economics was established in 1968. It was not included in the original group of awards included in Alfred Nobel's will in 1896.

The awards for contributions to chemistry and peace, physics, physiology or medicine were announced last week. The recipient of the literature prize will be announced on Thursday.