US profs Holmstrom, Hart share economics Nobel

STOCKHOLM: Two US-based professors won the Nobel prize in economics on Monday for studying how to best design contracts, work that sheds light on when it makes sense

STOCKHOLM: Two US-based professors won the Nobel prize in economics on Monday for studying how to best design contracts, work that sheds light on when it makes sense to give a CEO a bonus or privatise public services such as schools, hospitals and prisons.

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British-born Oliver Hart of Harvard University and Finnish economist Bengt Holmstrom of the Massachusetts Institute of Technology Finland will share the 8 million kronor ($930,000) award for their contributions to contract theory.

That’s a field of research that deals with incentives and risks involved in contracts drawn up between companies and employees, banks and lenders or insurance agents and their customers.In research in the 1970s, ‘80s and ‘90s, Hart and Holmstrom created “new theoretical tools” that shed light on how contracts help people and companies deal with conflicting interests and the “potential pitfalls” that occur when contracts are poorly designed, the Royal Swedish Academy of Sciences said.

“These kinds of insights into how we should design contracts are very important because we don’t want to give the wrong incentives ,” said Nobel committee member Tomas Sjostrom. “We don’t want to reward them for things that they were not responsible for. We want to reward the right thing.”

Hart, 68, is a London-born US citizen who has taught at Harvard since 1993. Holmstrom, 67, is an academic from Finland who used to serve on the board of the country’s mobile phone company Nokia.

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,” he said.