Oliver Hart and Bengt Holmström will share this year’s award for their contributions to contract theory.
“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,” the jury said on Monday.
Speaking to reporters in Stockholm by telephone, Holmstrom said he felt very lucky and grateful. “I certainly did not expect it, at least at this time, so I was very surprised and very happy, of course,” he said.
In the 1970s Holmstrom showed how a principal, for example a company’s shareholders, should design an optimal contract for an agent, like the CEO. His “informativeness principle” showed how the contract should link the agent’s pay to information relevant to his or her performance, carefully weighing risks against incentives, the academy said.
Holmstrom said his incentive to study contract theory came before he was an academic, when he was working for a company in the 1970s that tried to use computers to figure how to make strategic plans.
“That’s when I realized that the issue wasn’t really about the difficulty of coming up with the best plans,” he said. “The bigger issue was also to create incentives for people to give the right information that is needed for these plans and incentivize them in general.”
“Having workforce analytics be a part of a Nobel Prize in Economics, from prestigious academic organizations like MIT and Harvard shows the continued momentum and growth in this space”, says Greta Roberts Roberts, CEO of Talent Analytics, Corp.
For more information see MIT News -> https://news.mit.edu/2016/economist-bengt-holmstrom-nobel-prize-1010