The Nobel peace prize to the revolutionaries of the company contracts – the Journal

Camilla Accounts

“modern economies are held together by countless contracts and the new theoretical tools that are created are valuable to the understanding of contracts of real life and the institutions, as well as the potential pitfalls in the implementation of the contracts”. With this motivation the Nobel prize 2016 for economics has been awarded by the Royal Swedish academy of Sciences in the anglo-american Oliver Hart, and to the Finnish Beng Ceremony. Hart, born in 1948 in London, teaches at Harvard, while the Ceremony, was born in 1949 in Helsinki, teaches at Mit. The two researchers will share the prize of 8 million crowns (828 thousand euro).

The pivotal point of the studies developed by the two economists is a theoretical framework for the analysis of the contractual relationships that govern and permeate our society, from the remuneration of top managers – who often have targets that are different from those of the shareholders – to privatizations in the public sector, to arrive at the definition of the system more equitable and efficient in order to minimize conflicts of interest. At the end of the Seventies, Holmstroem has been shown as shareholders of a company should design an optimal contract for its chief executive officer, for which you know only a part of the action, in weighing accuracy the balance between risk and incentives. In subsequent work Holmstroem has included among the incentives of cash prizes, the objectives achieved by the managers and the behaviour of the individual members of a team that can take advantage of the work of other colleagues. Themes become particularly hot in recent times, after the outbreak of the financial crisis, which examine how banks and other economic agents to take risks to be unjustified because they know that you will not face the full cost of failure. In the mid-Eighties, Hart is dedicated to the “incomplete contracts” in explaining how the company should handle a situation that the agreement of the employee, not the rule. The economist has also studied other subjects: in particular, what types of companies should undertake a merger, what is the right mix between debt and equity financing, and when institutions like schools or prisons should be public or private.

“The Nobel prize for the theory of contracts reminds us of how important are incentives, a term absent from the economic debate, the Italian,” says Fausto Panunzi, professor of Political Economy at the Bocconi university of Milan, which had Hart as supervisor of his phd research at Mit. Studies have traced out a framework of mechanisms to ensure that the executives of a company perceive adequate salaries to performance, objectives achieved, but also deductions and co-wages and salaries in insurance, and the privatisation of public sector assets revolutionizing the field of corporate finance.

The choice has, however, disproved all the predictions of eve: “among the papabili there was the frenchman Olivier Blanchard, Edward Lazear, Marc Melitz, and Paul Romer.