Harvard, MIT professors win Nobel in economics for research on contract theory

From The Washington Post:

Harvard’s Oliver Hart and MIT’s Bengt Holmström were awarded the 2016 Nobel Memorial Prize in Economic Sciences on Monday for their work on contract theory, the study of how people can efficiently enter into agreements.

Their contributions have shaped the thinking in a wide range of fields, from law to economics to political science, affecting how scholars think about relationships employers and employees, between entrepreneurs and investors, and between governors and the governed.

British-born Hart, 68, teaches economics at Harvard University, while Finnish-born Holmström, 67, teaches at the Massachusetts Institute of Technology. They will share the prize evenly and split the kr8 million Swedish krona award (about $925,000).

“Oliver Hart, I’m so glad that I won it with him. He’s my closest friend here,” Holmström said to reporters shortly after learning of the Nobel decision.

Holmström’s work explores how best to motivate people — how to monitor and reward them for doing their jobs. As he notes, paying for performance does not always encourage employees to work their hardest, because bosses cannot completely keep track of what everyone is doing. Holmström has shown how it can make sense to offer people fixed salaries instead of variable bonuses in situations where measures of job performance are inadequate, as they often are. Performance pay can backfire, for instance, if it encourages chief executives to prioritize short-term gains, or if it forces teachers to teach to the test.

“I think it’s just such a richly deserved prize,” said Glenn Ellison, the head of MIT’s economics department. “Bengt’s work is outstanding both for answering really important questions, and for how beautifully crafted it is mathematically.”

Hart has investigated how best to write contracts when the possible outcomes are hazy. He changed the way that economists think about corporations, highlighting …

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