Oliver Hart Bengt Holmstrom
Some information on the Nobel Prize in Economics.
The Nobel Prize in Economics was first awarded in 1968 based on a donation from Sweden’s central bank, on its 300th anniversary. It is thus the youngest among the Nobel prize family and each year recognizes an outstanding contribution to the economics field.
This is the 48th year that the prize has been given and the two winners will share a prize of 8m Swedish krona (about 920,000 USD).
Some idea of contract theory.
Contract theory aims to further our understanding about how actors in the economy build contractual arrangements between themselves. In particular, given that contracts are often developed under incomplete information, or asymmetric information (when one party has more information than the other in the transaction), it explores ways to overcome suboptimal outcomes brought about by fears of “moral hazard” or free riding. How can optimal contracts for all parties be built under such constraints?
Optimal contracts can be developed by modelling behaviours of decision makers under different assumptions, and then applying specific rules to encourage optimal decisions. The idea is to find ways to get actors to take appropriate actions, for example in the cases of selling used cars, taking out insurance or devising employment contracts.
Speciality about this contribution.
Nobel Committee says the initial contributions of the two winners “launched contract theory as a fertile field of basic research. We now have the tools to analyse not only contracts’ financial terms, but also the contractual allocation of control rights, property rights, and decision rights between parties. The contributions by the laureates have helped us understand many of the contracts we observe in real life.”
In other words they have contributed a very valuable tool for the functioning of everyday transactions. In an economic climate characterized by so much uncertainty and distrust, this is an important contribution, and one that will remain useful for years to come.
