Contract theory earns pair Nobel Economics Priz

STOCKHOLM: Two US-based academics won the Nobel Economics Prize on Monday for groundbreaking research on contract theory that has helped design insurance policies, executive pay and even prison management.Oliver Hart, a British-American economist, and Bengt Holmstrom of Finland “have developed contract theory, a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities,” the Nobel jury said.Their pioneering work has laid “an intellectual foundation” for designing policies and institutions in many areas, it added.Working separately, the two created tools to help determine whether teachers, healthcare workers, and prison guards should receive fixed salaries or performance-based pay, and whether providers of public services, such as schools, hospitals, or prisons, should be publicly or privately owned.”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.”Hart, born in 1948, is an economics professor at Harvard University in the United States, while Holmstrom, 67, is a professor of economics and management at Massachusetts Institute of Technology.The pair will share the eight million kronor (826,000 euros, $924,000) prize.”My first action was to hug my wife, wake up my younger son … and I actually spoke to my fellow laureate,” Hart told the Nobel Foundation website.Holmstrom meanwhile told reporters via video link at the Nobel press conference in Stockholm that he was “very surprised, and very happy” to win the prestigious award.Holmstrom is known for his research into how contracts and incentives affect corporate behaviour including governance, as well as liquidity problems in financial crises.