British-born Oliver Hart and
Finland's Bengt Holmstrom won the Nobel Economics Prize on
Monday for work that addresses a host of questions from how best
to reward executives to whether schools and prisons should be
privately owned.
Their findings on contract theory have implications for
corporate governance, bankruptcy legislation and political
constitutions, among other fields, said the Royal Swedish
Academy of Sciences, which announced the 8 million Swedish crown
($928,000) prize.
"This theory has really been incredibly important, not just
for economics, but also for other social sciences," said Per
Stromberg, member of the prize committee and professor at the
Stockholm School of Economics.
Contract theory considers, for example, whether managers
should get paid bonuses or stock options, or whether teachers or
healthcare workers should be paid fixed rates or by
performance-based criteria.
Hart is economics professor at Harvard University while
Holmstrom is professor of economics and management at the
Massachusetts Institute of Technology.
In total, the nine academics who won Nobel prizes this year
in medicine, physics, chemistry and economics included five born
in Britain, a Frenchman, a Finn, a Dutchman and a Japanese.
While, none was American-born, six - including all five
Britons - are based at US universities.
Early morning call
"I woke at about 4.40am and was wondering whether it was
getting too late for it to be this year, but then fortunately
the phone rang," Hart was quoted as saying on the official
Twitter account of the Nobel Prize.
"My first action was to hug my wife, wake up my younger
son."
Hart's work has focused in part on understanding which
companies should merge and the right mix of financing, and when
institutions such as schools, prisons and hospitals should be
privately or publicly owned, the academy said in a statement.
He has argued that the incentives for cost reduction in
privatised services, such as private prisons in the United
States, are typically too strong.
Holmstrom has studied the setting of contracts for workers
from teachers to corporate bosses, concluding that: "In
industries with high risk, payment should ... be relatively more
biased towards a fixed salary, while in more stable environments
it should be more biased towards a performance measure", the
academy said.
He had argued that teachers' pay should not just be based on
students' test scores, but set in a way that would also reward
the teaching of harder-to-measure skills such as creativity and
independent thinking.
"The results of this multi-tasking model changed how
economists think about optimal compensation schemes and job
design," the academy said.
