The professors from MIT and Harvard, both NEC members, have been instrumental in the design and creation of contract theory. In the 1970s, Dr. Holmstrom showed evidence that employers should tie pay to the broadest method of performance evaluation. Dr. Hart’s work stated that contracts should act as incomplete manuals, saying how decisions should be made instead of outlining every task. The work from both economists has transformed the way people and companies create contracts.
“Modern economies are held together by innumerable contracts,” said the Royal Swedish Academy of Sciences, which awarded the prize. “Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.”