This year, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 has been awarded to both Oliver Hart, Professor of Economics at Harvard University and Bengt Holmström, Professor of Economics at the Massachusetts Institute of Technology. The Nobel Prize in Economics was given to the Professors for their contributions to contract theory, as mentioned by the Royal Swedish Academy of Sciences in their press release.

This year’s laureates have worked extensively on the construction of a clearly defined and detailed regulatory rubric for determining, among other things, the method of reward for company executives and further analysis of the privatization of public companies or even entire public sectors, whether in whole or in part. The new theoretical tools developed by Hart and Holmström are valuable to understand real-life contracts and institutions as well as potential pitfalls in contract design.

Holmström in his work has stressed the nexus between performance and compensation in the context of the employment contract, and the need for these two factors to be directly proportional.

Hart’s research has delved into the realm of inchoate contracts and the need to have an open approach to them while maintaining a firm grasp on the rules governing such situations. This illuminates a clear path not to the precise outcome but rather to the method of determining a specific outcome in a general situation, the eventualities of which cannot be ascertained previously.

You can access the announcement of the Sveriges Riksbank Prize in economic sciences in memory of Alfred Nobel 2016 here.

If you are interested in reading about last year’s winners, take a look at this blog post on the 2015 Nobel Prize recipients and their work.

Photo Credit: Flickr @Solis Invicti