Image copyright Getty Images Image caption Oliver Hart and Bengt Holmstrom will share the 8 million Swedish krona (£744,652) prize

UK-born Oliver Hart and Bengt Holmstrom of Finland have won the Nobel economics prize for work on contract theory.

Judges said their work laid "an intellectual foundation" for policies in areas such as bankruptcy legislation and political constitutions.

The pair will receive 8 million Swedish krona (£744,652) from the committee.

Mr Hart, who was woken with the news at 4.40am, said his first reaction had been to hug his wife and wake his younger son.

Mr Holmstrom said he felt "very lucky" and "grateful".

The Royal Swedish Academy of Sciences said that Mr Hart and Mr Holmstrom's work was "valuable to the understanding of real-life contracts and institutions".

It also said it could identify "potential pitfalls in contract design."

Working separately, the two created tools to help determine whether public sector workers should receive fixed salaries or performance-based pay, and whether providers of public services should be publicly or privately owned.

Mr Holmstrom in particular is known for his research into how contracts and incentives affect corporate behaviour.

The former Nokia board member declined to say whether he thought executive pay was too high these days, but commented: "My personal view is that [top executives' contracts] are too complicated today."

Competitive field

Mr Holmstrom, aged 67, is a professor of economics and management at Massachusetts Institute of Technology, while Mr Hart, born in 1948, is an economics professor at Harvard University in the US.

The pair saw off competition from the World Bank's new chief economist Paul Romer, who was widely tipped to win.

New York University's Stern Business School, where Prof Romer teaches, sparked controversy last Thursday when it accidently published a press release naming him as the winner.

Image copyright JUSSI NUKARI Image caption In the 1970s, Bengt Holmstrom showed how contracts could effectively link managers' pay to their performance

It quickly took down the release, saying it was only preparing for a possible win.

Others believed to be the running included Olivier Blanchard, a former chief economist at the International Monetary Fund, and Edward Lazear, a fellow at the Hoover Institution, Stanford University.

Americans dominate

The economics prize is the only Nobel not created by Alfred Nobel, and was instead launched in 1968, long after the philanthropist's death.

To date Americans have dominated the award, with 55 of the 76 laureates holding US citizenship, including those with dual nationalities.

Last year Scottish-born economist Angus Deaton won the prize for his use of data to investigate income inequality and inform economic policy.

It is the fifth Nobel to be announced this year, after prizes for physiology or medicine, physics, chemistry and peace were awarded last week.

The Nobel prize for literature will be awarded on Thursday.

Previous winners of the Nobel prize for economics:</s>Britain’s Oliver Hart and Finland’s Bengt Holmstrom have won the Nobel Economics Prize 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 (MIT).

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.

The Noble prize for economics, which emerged in 1968, is the only one not created by the institutions’s founder Alfred Nobel.

“I woke at about 4:40 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.</s>(JTA) — American-Jewish economist Oliver Hart, a professor of economics at Harvard University, and Bengt Holmstrom of Finland, a professor of economics and management at Massachusetts Institute of Technology, were awarded the 2016 Nobel Economics Prize.

The prize was awarded on Monday for their work on contract theory, which studies how contracts allow people to deal with conflicting interests.

Hart, 68, did his Nobel-winning work in the 1980s, according to the academy, and Holmstrom did his in the 1970s.

Hart is the son of the late Philip D’Arcy Hart, who died ten years ago at the age of 106 and who was a leading British medical researcher and pioneer in tuberculosis treatment. He is descended from a prominent London Jewish family, including his great-grandfather, an Orthodox Jew named Samuel Montagu, who was a member of the House of Commons for 15 years until 1900 and then received a peerage becoming the 1st Baron Swaythling. Hart’s mother is Ruth Meyer, a medical gynecologist.

He is married to Rita Goldberg, a Harvard literature professor and author of the second-generation Holocaust memoir “Motherland: Growing Up With the Holocaust.”

Hart and Holmstrom will split the eight million kronor, or $924,000, prize.</s>STOCKHOLM (AP) — British-born Oliver Hart and Bengt Holmstrom of Finland won the Nobel Memorial Prize in Economic Sciences for their contributions to contract theory, shedding light on how contracts help people deal with conflicting interests.

The Royal Swedish Academy of Sciences said their theories “are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design.”

For example, contract theory can be used to analyze performance-based pay for CEOs or deductibles and co-pays for insurance, the academy said.

The economics prize is not an original Nobel Prize. It was added to the others in 1968 by Sweden’s central bank.

The Nobel Prizes in medicine, physics, chemistry and the Nobel Peace Prize were announced last week. This year’s Nobel announcements will finish Thursday with the literature award.

Each award is worth 8 million kronor, or about $930,000. The laureates will collect them on Dec. 10, the anniversary of prize founder Alfred Nobel’s death in 1896.</s>Oliver Hart and Bengt Holmström have been awarded the Nobel Prize for Economics in 2016 for their work on the theory of making contracts work to optimise the incentives faced by people.

The award – which is officially known as the Sveriges Riksbank Prize in memory of Alfred Nobel – will be shared by the pair of academic economists “for their contributions to contract theory”, said the prize committee.

Mr Hart, a Briton at Harvard University, and Mr Holmström, a Finn who teaches at the Massachusetts Institute of Technology, are the 48th recipients of the Nobel, which was announced by Royal Swedish Academy of Sciences in Stockholm today.

They will share a prize of 8m Swedish krona ($920,000) between them.

“Through their initial contributions, Hart and Holmström launched contract theory as a fertile field of basic research” said the Nobel committee, adding:

Mr Hart, 68 and born in London, is the second consecutive Briton to receive the prize after Angus Deaton won the Nobel last year.

He made his mark developing the theory of “incomplete contracts” in circumstances where it is impossible to specify every aspect of a contract. Much of his work aims to find out whether services should be run by the public or private sector.

Mr Hart’s model does not say which type of ownership is better, but specifies the conditions under which certain government services should be privatised while others should be left in the public sector.

Reacting to the news, he said: “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”.

“Contracts are just an incredibly powerful way of thinking about parts of economics. They’re just fundamental to the whole idea that trade is a quid pro quo and that there are two sides to a transaction”.

US economist Justin Wolfers described the pair as “an unarguably splendid pick”. He tweeted Mr Hart was “brilliant, engaging and thoughtful”.

“Hart and Holmstrom’s work is all about our messy reality”, he added.

“I feel very luck and grateful”, said Mr Holmström, who is the Paul A. Samuelson Professor of Economics at MIT. “I certainly did not expect it, at least at this time. I was very surprised and very happy of course.”

Mr Holmström has pioneered work in principal agent theory in circumstances where information is difficult to obtain.

The theory has helped underpin employment contracts, allowing companies to know they have optimised incentives in areas such as setting pay levels and opportunities for promotion when people work in teams and have the scope to free ride on the efforts of others.

Contract theory informs everything from the nature of insurance contracts to the behaviour of politicians, said the Nobel committee.</s>This year’s Nobel prize in economics has been awarded to UK-born Oliver Hart and Bengt Holmström of Finland for their work on contract theory which has covered a range of issues from public-private partnerships to executive pay.

As it announced the prize, the Royal Swedish Academy of Sciences described the pair’s work as key to the understanding of the real-life contracts and institutions that hold together modern economies.

Holmström, now working at the Massachusetts Institute of Technology, and Hart of Harvard University, drew praise and congratulations from fellow economists, although they had not been seen as frontrunners for the honour, officially known as the Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel.

Holmström said he certainly had not expected the prize and described himself as “very lucky and grateful”. Hart appeared to have been a little more expectant. After the announcement, he tweeted: 



The prize givers said the award reflected the pair’s role in launching contract theory as a “fertile field of basic research” and their subsequent work that has helped lay a foundation for designing policies and institutions in areas from bankruptcy legislation to political constitutions.



“Society’s many contractual relationships include those between shareholders and top executive management, an insurance company and car owners, or a public authority and its suppliers. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions,” the Royal Swedish Academy of Sciences said.

“This year’s laureates have developed contract theory – a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.”

Hart’s research work has included a damning assessment of America’s private prisons. He showed that the pressure to cut costs was too great, leading to an unacceptable drop in quality. At the core is the issue of “incomplete contracts” – the fact that contracts are not detailed enough to cover every small point.

Holmström is known for pioneering research into executive pay. In a news conference to mark the Nobel award, Holmström was asked what he made of large bonuses awarded under modern-day contracts. “My personal view is they are too complicated today,” he said.</s>STOCKHOLM – British-born Oliver Hart and Bengt Holmstrom of Finland won the Nobel prize in economics for their contributions to contract theory, shedding light on how contracts help people deal with conflicting interests.

Such contractual relationships can deal with anything from CEO bonuses to the deductibles and co-pays for insurance, the Royal Swedish Academy of Sciences said Monday.

"The new theoretical tools created by Hart and Holmstrom are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design," the academy said.

Both laureates are economics professors at universities in Cambridge, Massachusetts. The London-born Hart, 68, who is an American citizen, works at Harvard University, while Holmstrom, a 67-year-old Finnish citizen, works at Massachusetts Institute of Technology. Holmstrom has also served on the board of Finnish mobile phone company Nokia.

Speaking to reporters in Stockholm by telephone, Holmstrom said he felt "very lucky" and "grateful."

In the 1970s Holmstrom showed how a principal, for example a company's shareholders, should design an optimal contract for an agent, like the CEO. His "informativeness principle" showed how the contract should link the agent's pay to information relevant to his or her performance, carefully weighing risks against incentives, the academy said.

Hart made fundamental contributions to a new branch of contract theory in the mid-1980s. His findings on "incomplete contracts" shed new light on the ownership and control of businesses, the academy said.

"His research provides us with theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and which institutions such as schools or prisons ought to be privately or publicly owned," the academy said.

The economics prize is not an original Nobel Prize. Formally called the Nobel Memorial Prize in Economic Sciences, it was added to the others in 1968 by Sweden's central bank.

The Nobel Prizes in medicine, physics, chemistry and the Nobel Peace Prize were announced last week. This year's Nobel announcements will finish Thursday with the literature award.

Each award is worth 8 million kronor, or about $930,000. The laureates will collect them on Dec. 10, the anniversary of prize founder Alfred Nobel's death in 1896.</s>STOCKHOLM: British-born Oliver Hart and Finland-born Bengt Holmstrom won the 2016 Nobel Economics Prize for their contributions to contract theory, helping the understanding of issues like the performance-based pay for top executives.

“(Their work) lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions,” the Royal Swedish Academy of Sciences said on announcing the 8 million Swedish crown (US$928,000) prize.

Hart is economics professor at Harvard University while Holmstrom is professor of economics and management at the Massachusetts Institute of Technology.

“I woke at about 4:40 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 helped understanding which companies should merge and the right mix of financing and when institutions such as such as schools should be privately or publicly owned, the academy said in a statement.

Holmstrom’s work helped how to formulate contracts for executives, the statement added. — Reuters</s>Two professors from Harvard and MIT have been awarded the Nobel Prize in economics for contributions to contract theory -- the agreements that shape business, finance and public policy.

Oliver Hart, a British economist teaching at Harvard, and Bengt Holmström, a Finnish economist teaching at MIT, were announced as the winners Monday by the Royal Academy of Sciences in Stockholm, Sweden.

"Contracts are essential to the functioning of modern societies," the academy's said in its announcement. "Hart's and Holmström's research sheds light on how contracts help us deal with conflicting interests."

Among the contracts they have studied is Holmström's research on employment contracts, including between CEOs and shareholders, and Hart's work on whether providers of public services, such as schools, hospitals, or prisons, should be publicly or privately owned.

The Nobel prize in economics has been awarded since 1969.

Princeton University Professor Angus Deaton won the prize in 2015 for his work on poverty.</s>British-born Oliver Hart says he hopes his Nobel win in economics is influential in the long-run as he addresses the media following the prize announcement. Rough Cut (no reporter narration).
British-born American Oliver Hart and Finnish Bengt Holmström win the Nobel Prize in Economics for their work on the science of contracts.