Contract theorists Oliver Hart and Bengt Holmström win Nobel prize

10 Oct 2016

Nobel prize. Image: Vladislav Gajic

Decades of work on contract theory have helped Oliver Hart and Bengt Holmström win the 2016 Nobel prize for economics.

The latest* Nobel prize winners has been announced, with England’s Oliver Hart and Finland’s Bengt Holmström taking the honours in the economics field, which enjoys a longer name of the ‘Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’.

The duo shared the prize “for their contributions to contract theory”, with theorising dating back to the 1970s (Holmström) and 1980s (Hart) underpinning this year’s commendation.

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“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,” said Hart on hearing the news.

“My first action was to hug my wife, wake up my younger son … and I actually spoke to my fellow laureate,” he said.

Holmström first looked at the forging of contracts that related to work unseen by those in charge, discussing incentivised contracts as a way of ensuring behaviour that is beneficial to the company.

Hart’s look at ‘incomplete contracts’ highlighted how impossible it is to plan for every single eventuality, shedding new light on ownership, control and responsibility.

The Nobel Prize medal, front and back. Image: The Nobel Foundation/Lovisa Engblom

The Nobel Prize medal, front and back. Image: The Nobel Foundation/Lovisa Engblom

Through their initial contributions, Hart and Holmström launched contract theory as a fertile field of basic research, according to the Nobel Foundation.

“Over the last few decades, they have also explored many of its applications,” it said when announcing the winners.

“Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.”

The 2016 Nobel Prize winner for physiology or medicine was last week revealed as Yoshinori Ohsumi, for his 1990s work on autophagy, discovering the mechanism behind the process.

Autophagy is the process of ‘self-eating’ that cells go through, destroying their own contents and recycling certain components.

The Nobel Prize for chemistry was awarded to some of the world’s leading researchers for their design and production of molecular machines.

In describing the work of the three Nobel laureates – Jean-Pierre Sauvage, Sir J Fraser Stoddart and Bernard L Feringa – the committee said that their miniaturised machines have “taken chemistry to a new dimension”.

Elsewhere, physicists David J Thouless, F Duncan M Haldane and J Michael Kosterlitz were jointly awarded the Nobel Prize in physics for their efforts in unlocking the secrets of mysterious, exotic matter.

Meanwhile, Colombian President Juan Manuel Santos won the Nobel peace prize last Friday for his efforts to end a 52-year-old war with Marxist guerrillas, the award coming as a surprise to some.

Updated, 2.02pm, 10 October 2016: This article was updated to clarify that the Nobel prize for economics is the latest 2016 award, not the last.

Gordon Hunt was a journalist with Silicon Republic