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Comment on Nobel Prize Winnerns

10.10.2016

Comment by Prof. Dennis J. Snower, President of the Kiel Institute for the World Economy:

“Oliver Hart deserves the Nobel Prize. Not because he was one of my classmates in Princeton and we spent a good deal of our time playing table tennis in the basement of the economics department. We had many discussions about the economics of imperfect information.

Five years after leaving Princeton graduate school, Oliver developed the theory of incomplete contracts, a part of contract theory, originally developed by the Nobel Laureate Ken Arrow. In practice, most contracts are incomplete, in the sense that they do not specify all the circumstances that the participants to the contract face. On this account, it is very useful to have a theory of how decisions are made when aspects of a contract remain unspecified. These ideas have been applied widely, such as in the analysis of mergers, the appropriate mix of debt and equity finance, public versus private ownership of institutions, as well as in political science and law.

Bengt Holmstrom made fundamental contributions to principal-agent theory. This concerns how a principal (such as a manager) should design contracts when the agent (such as an employee) has different objectives from the principal.”