Economic Growth

Everything you need to know about this year's Nobel Prize in Economics

Tomas Sjostrom, member of the Committee for the Prize in Economic Sciences in Memory of Alfred Nobel, Goran K. Hansson, Secretary General of the Royal Swedish Academy of Sciences and Per Stromberg, Chairman of of the Committee for the Prize in Economic Sciences in Memory of Alfred Nobel, during a news conference presenting the laureates for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016: Oliver Hart and Bengt Holmstrom, in Stockholm, Sweden, October 10, 2016.

Image: TT News Agency/Stina Stjernkvist/ via REUTERS

Jennifer Blanke
Member of the Board, Syngenta Foundation for Sustainable Agriculture
Our Impact
What's the World Economic Forum doing to accelerate action on Economic Growth?
The Big Picture
Explore and monitor how Economic Progress is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Economic Progress

This year’s Nobel Prize in Economics has gone to two economists, Oliver Hart from Harvard University, and Bengt Holmström from the Massachusetts Institute of Technology, for their work on contract theory. Although contract theory sounds like it might be more relevant to the practice of law, it turns out that understanding the way contracts are modelled is fundamental to many economic behaviours and phenomena.

What is the Nobel Prize in Economics?

The Nobel Prize in Economics (or more volubly the Swedish National Bank's Prize in Economic Sciences in Memory of Alfred Nobel), was first awarded in 1968 based on a donation from Sweden's central bank, on its 300th anniversary. It is thus the youngest addition to the Nobel prize family and each year recognizes an outstanding contribution to the economics field.

This is the 48th year in which the prize has been given and the two winners will share a prize of 8m Swedish krona ($920,000).

What is contract theory?

Contract theory aims to further our understanding about how actors in the economy build contractual arrangements between themselves. In particular, given that contracts are often developed under incomplete information, or asymmetric information (when one party has more information than the other in the transaction), it explores ways to overcome suboptimal outcomes brought about by fears of “moral hazard” or free riding. How can optimal contracts for all parties be built under such constraints?

Optimal contracts can be developed by modelling behaviours of decision makers under different assumptions, and then applying specific rules to encourage optimal decisions (where both parties in a transaction are better off). The idea is to find ways to get actors to take appropriate actions, for example in the cases of selling used cars, taking out insurance or devising employment contracts.

What is so special about this contribution?

According to the Nobel Committee, the initial contributions of the two winners “launched contract theory as a fertile field of basic research… we now have the tools to analyse not only contracts’ financial terms, but also the contractual allocation of control rights, property rights, and decision rights between parties. The contributions by the laureates have helped us understand many of the contracts we observe in real life.”

In other words they have contributed a very valuable tool for the functioning of everyday transactions. In an economic climate characterized by so much uncertainty and distrust, this is an important contribution, and one that will remain useful for years to come.

Have you read?
Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

Eurozone recovery begins and other economics stories to read

Kate Whiting

May 17, 2024

About Us



Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum