Two economists win Nobel prize for study on setting pay and rewards

British-born Oliver Hart and Finland’s Bengt Holmstrom 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 in such areas as corporate governance, bankruptcy legislation and political constitutions, said the Royal Swedish Academy of Sciences, which announced the eight million Swedish crown ($928,000) prize yesterday.

“This theory has really been incredibly important, not just for economics, but also for other social sciences,” said Per Stromberg, a 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 an economics professor at Harvard University, while Holmstrom is a 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 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.

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He has argued that the incentives for cost reductions in privatized 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. He concluded 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.

On MIT’s Twitter feed, Holmstrom said he felt grateful and lucky to have won the Nobel Economics Prize. “Research that exactly goes where you expected it to go is uninteresting, on the whole,” he said.