Oliver Hart and Bengt Holstrom’s contract theory wins award in memory of Alfred Nobel
Q. Oliver Hart and Bengt Holstrom won which award on 10th Oct in memory of Alfred Nobel?- Published on 12 Oct 16a. Sveriges Riksbank Prize in Economic Sciences
b. Nobel Prize for Economics
c. Abel Prize
d. None of the above
ANSWER: Sveriges Riksbank Prize in Economic Sciences
Oliver Hart and Bengt Holstrom on 10th October 2016 won the 2016 Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel for their contributions to contract theory.
- They developed a contract theory which is a comprehensive framework for analysing many diverse issues in contractual design such as performance based pay for top executives, deductibles and co-pays in insurance and privatisation of public sector activities
- Fresh theoretical tools created by Hart and Holstrom are valuable to the understanding of real life institutions and contracts as well as potential pitfalls in public sector activities
- In the 1970s. Bengnt Holestrom demonstrated how a principal should design an optimal contract for an agent whose action is partly observed by the principals
- Holmstrom’s informativeness principle stated how this contract should link the agent’s pay to performance relevant information
- Using the basic principal agent model, he demonstrated how a principal should design an optimal contract for an event whose action is partly unobserved by the principal
- His informativeness principle stated precisely how this contract should link the agent’s pay to performance relevant information
- Using the basic principal agent model, he demonstrated how the optimal contract carefully weights risk against incentives
- Holstrom generalised these results to more realistic settings such as when employees are not only rewarded with pay but with potential promotion as well and individual members of the team free ride on the efforts of others
- In the mid 1980s, Oliver Hart made a fundamental contribution to a new branch of contract theory that deals with the important case of incomplete contracts
- Hart’s findings shed new light on ownership and control of businesses and have had a vast impact on several fields such as economics, political science and law
- His research provides new theoretical tools for ascertaining the questions as to which kinds of companies should merge, proper mix of debt and equity financing and when institutions such as schools or prisons can be privately or publicly owned
- While Hart is a Professor of Economics at Harvard University, Cambridge United States, Bengt Holstrom is a Professor of Economics and Management at MIT.
