For more than 40 years, MIT Sloan Economist Bengt Holmström has laid a foundation of formative work in contract theory. Now, finally, his work on the subject—along with that of Harvard Professor Oliver Hart—has been recognized by the Royal Swedish Academy of Sciences, earning the pair a Nobel Prize.
Holmström, 67, is the fifth to win the Nobel Prize in Economic Sciences while serving as a member of the MIT faculty, joining Paul A. Samuelson (1970), Franco Modigliani (1985), Robert M. Solow (1987) and Peter Diamond (2010). Holmström joined the MIT faculty in 1994.
“I am very lucky,” he said in a statement after earning the achievement, also giving credit to fellow MIT faculty members and mentors. A press conference was held for Holmström Monday, in which he was introduced by MIT President L. Rafael Reif.
Reif said, openly, “MIT’s latest Nobel laureate is not only an extraordinary economic thinker. Bengt Holmström is also an outstanding citizen of MIT and a delightful human being.”
Not too long after Holmström began his work in the field in the ‘70s, Hart began to offer his valuable contributions, which focus on the importance of incomplete contracts.
The basis of incomplete contracts has become a foundation for current economic theory when it comes to businesses and handling employees. Hart’s work addresses the eventual outcomes of things that contracts do not cover, since it’s impossible for a worker-based contract to cover every single circumstance that may or may not happen after it is signed.
“Hart’s findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law,” the Royal Swedish Academy of Sciences writes. “His research provides us with new theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing and when institutions such as schools or prisons ought to be privately or publicly owned.”
On their collective work, the Royal Swedish Academy of Sciences added: “Through their initial contributions, Hart and Holmström launched contract theory as a fertile field of basic research. Over the last few decades, they have also explored many of its applications. Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.”
