Oliver Hart, Bengt Holmstrom win Nobel prize in economics

STOCKHOLM : British-born Oliver Hart and Bengt Holmstrom of Finland won the Nobel prize in economics for their contributions to contract theory, shedding light on how contracts help people deal with conflicting interests, reports UNB.
Such contractual relationships can deal with anything from CEO bonuses to the deductibles and co-pays for insurance, the Royal Swedish Academy of Sciences said Monday.
“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.
Both laureates are economics professors at universities in Cambridge, Massachusetts. The London-born Hart, 68, who is an American citizen, works at Harvard University, while Holmstrom, a 67-year-old Finnish citizen, works at Massachusetts Institute of Technology. Holmstrom has also served on the board of Finnish mobile phone company Nokia.
Speaking to reporters in Stockholm by telephone, Holmstrom said he felt “very lucky” and “grateful.”
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.
Hart made fundamental contributions to a new branch of contract theory in the mid-1980s.