The 48th Nobel prize in Economic Sciences was awarded on Monday 10th October 2016 in Stockholm. The prize was awarded to Oliver Hart (Harvard) and Bengt Holmström (MIT) for their contributions in Contract theory. Holmström has been seen as one of the leading researchers in many different fields of corporate theories. Hart is one of the firsts to research Contract theory and he has been studying for example questions about who should be the one who is in charge of decision-making in things that have not been pointed out in a contract. Holmström’s and Hart’s research on contracts have been crucial in the field of contract theory, which lead to them being given the Nobel prize.
Contract theory is Economic analysis of contracts, and it studies contact-making in a situation where information is asymmetric. The analysis focuses on how different parties construct legal agreements and how they are prepared to situations of uncertain conditions. Contract theory states that a contract will provide understanding and agreement of what is expected of the parties – how they stand and how they should perform. One of contract theory’s practices divides the theory into three types of frameworks: moral hazard, adverse selection and signaling. These three frameworks describe situations of asymmetrical information – either by inability to observe the other party’s action, not being informed about things that would affect contracts or conveying information.
The importance of contracts is best seen when no contracts are made, for it’s troublesome to prove anything that has been agreed upon for example orally. The researcher’s efforts in the field have influenced contract-making as well as made it easier to understand how and when contracts should be made. Holmström and Hart have also identified potential pitfalls in contract design, the biggest of them being that the parties aren’t really aware of what they are making a contract about. Implementation of the contract can also be difficult if none of the parties knows what they are doing. It’s important to set these ground rules when making contracts.
Contract theory, investopedia The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016, Nobelprize.org Talouden Nobel julkistetaan tänään - Katso verkosta suorana, Yle Avoiding the Ten Most Common Pitfalls in Choosing and Deploying Contract Management Solutions Picture