The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to Oliver Hart, Harvard University, Cambridge, MA, USA and Bengt Holmström, Massachusetts Institute of Technology, Cambridge, MA, USA “for their contributions to contract theory”.
Among the contracts they have studied is Holmström's research on employment contracts, including between CEOs and shareholders. "In economics we don't really take a stand on the size of the bonus, though they seem extraordinarily high," Holmström told reporters when asked about the multi-million-dollar bonuses paid to modern CEOs. Hart's research has looked at whether providers of public services, such as schools, hospitals, or prisons, should be publicly or privately owned. The research showed that "incentives for cost reduction are typically too strong," the academy said. Privatizing those types of services can lead to a reduction in quality greater than the advantages of cost savings.
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