British-born economist Oliver Hart says he was lying in bed this morning, assuming that he’d lost his chance at a Nobel Prize this year, when the phone suddenly rang. It was the Royal Swedish Academy of Sciences, telling him that this year’s prize was being awarded to Hart and Bengt Holmström of Finland for their contributions to contract theory, which has been used to explain all types of transactions from CEO bonuses to deductibles and copays for insurance.
Hart has studied the privatization of public services and different ways that the government can get high-quality results at a low cost. Holmström has examined executive pay and how linking bonuses to profits can backfire if it encourages short-term planning.
Here is the announcement: