Negotiation Theorists Win Nobel for Research on Contract Theory
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Harvard professor Oliver Hart and MIT’s Bengt Holmström were awarded Monday the 2016 Nobel Memorial Prize in Economic Sciences 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.
Holmström’s work explores how best to monitor and reward people for doing their jobs. Paying for performance does not always encourage employees to work their hardest, particularly when managers often cannot completely keep track of everyone is doing, his work suggests. Holmström’s theories illustrate how in some situations, it makes sense to offer people fixed salaries, instead of variable bonuses tied to results of their work.
Hart has investigated how best to write contracts when some of the possible outcomes are hazy. This is one of the central questions when governments decide to privatize their duties by hiring outside companies. Hart’s research shows that these companies often face strong incentives to cut corners, complicating the idea that the private market is always more efficient.
“When you start thinking about it contracts are really fundamental,” said Professor Per Strömberg, Chairman of the Economic Sciences Prize Committee. “We see them everywhere in society. All of us are engaged in different types of contracts.”
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