The Nobel Prize and the Theory of Contracts

Anouk Fülöp
Anouk just finished her Bachelor EBE and is currently working as an intern at Philips. She is interested in Behavioral Economics and current events.

In the past couple of weeks the Nobel Prize has been in the news a lot. First because the Nobel Prize for Chemistry was won by someone from the Netherlands. Then because the Nobel Prize in literature was awarded to Bob Dylan. But what about the prize for Economic Sciences?


For the sceptics, I know the prize for Economic Sciences is officially not a Nobel Prize. However, being awarded and winning is still a great honour. So who won the Sveriges Riksbank Prize in Economics Sciences in Memory of Alfred Nobel? This year the prize was awarded to not just one, but two people. The lucky ones were Oliver Hart and Bengt Holmström “for their contributions to contract theory”. They created insights that “are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design”.


Oliver Hart (British) is the Andrew E. Furer Professor of Economics at Harvard University. He started teaching in 1993 and only two years later published the book ‘Firms, Contracts and Financial Structure’.  Besides that he has published a lot of articles and he has used his knowledge in legal cases.

Bengt Holmström (Finnish) is the Paul A. Samuelson Professor of Economics and Management at Massachusetts Institute of Technology, better known as MIT. He has also worked at Northwestern University and Yale and has published quite a lot of articles.


So what is contract theory about? Think about your own life. Can you imagine a life where there are no contracts? In this age that certainly proves difficult. You have to sign a contract when renting a room, getting a job or internship, getting married. Those are just a few of the many times a contract will be given to you. There is probably nobody who understands contracts better than Sheldon from the Big Bang Theory, but Oliver Hart and Bengt Holmström have dedicated years of research to this topic. Even though there are few papers that carry the name of both men, there are some similar topics when it comes to their work. For example, both have focused on the necessity of trade-offs when setting the terms of a contract. Also, both have looked into the role that power plays when planning co-operative ventures. So if you ever need to draw up a contract, these are the guys you need to listen to.


Image source: DasWortgewand

Leave a Reply

Your email address will not be published. Required fields are marked *