Bengt Holmström, an influential MIT economist and long-time MIT faculty member, was this week awarded the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He shares this honor with Oliver Hart of Harvard for their deeply influential work on contract theory, including the optimal design of contracts between employers and employees.
Holmström holds a joint appointment between the Department of Economics and the MIT Sloan School of Management.
"MIT's latest Nobel laureate is not only an extraordinary economic thinker," said MIT President L. Rafael Reif while introducing Holmström at an on-campus press conference on Monday morning. "Bengt Holmström is also an outstanding citizen of MIT and a delightful human being."
Oliver Hart and Professor Holmström have devoted their lives' work to what's called contract theory—how and why contracts work and how they can be made better. This niche has just begun to gain the same cachet in academic circles as game theory and the study of stock market fluctuations.
"Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions," the Royal Swedish Academy of Sciences wrote in its Nobel announcement.
Their work has touched on everything from executive pay to health insurance deductibles to the use of tax shelters and how to divide up control of a firm when it's not explicitly written into an agreement. Holmström's economic models, for example, can help companies develop the right incentives to optimize employees' performance.
"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.