Economists share No­bel prize for work on pay, re­wards, pris­ons

China Daily (USA) - - FRONT PAGE - By REUTERS in Stockholm/Cam­bridge, Mass.

Bri­tish-born Oliver Hart and Fin­land’s Bengt Holm­strom won the No­bel Eco­nom­ics Prize on Mon­day for work that ad­dresses a host of ques­tions from how best to re­ward ex­ec­u­tives to whether schools and pris­ons should be pri­vately owned.

Their find­ings on con­tract the­ory have im­pli­ca­tions in such ar­eas as cor­po­rate gov­er­nance, bank­ruptcy law and po­lit­i­cal con­sti­tu­tions, said the Royal Swedish Academy of Sciences, which an­nounced the 8 mil­lion Swedish crown ($928,000) prize.

“This the­ory has re­ally been in­cred­i­bly im­por­tant, not just for eco­nom­ics, but also for other so­cial sciences,” said Per Stromberg, a mem­ber of the prize com­mit­tee and pro­fes­sor at the Stockholm School of Eco­nom­ics.

Con­tract the­ory con­sid­ers, for ex­am­ple, whether man­agers should get paid bonuses or stock op­tions, or whether teach­ers or health­care work­ers should be paid fixed rates or by per­for­mance-based cri­te­ria.

Holm­strom, a 67-year-old pro­fes­sor of eco­nom­ics and man­age­ment at the Mas­sachusetts In­sti­tute of Tech­nol­ogy, said he had been friends with Hart for decades and was thrilled to be shar­ing the award with him.

“He’s my clos­est in­tel­lec­tual friend here and a per­sonal friend also. And he has been im­por­tant for my think­ing and I hope I have been im­por­tant for his think­ing,” he told Reuters Tele­vi­sion at his home in Bos­ton.

Hart, an eco­nom­ics pro­fes­sor at Har­vard Uni­ver­sity, has fo­cused on un­der­stand­ing which com­pa­nies should merge and with what mix of fi­nanc­ing, and when in­sti­tu­tions such as schools, pris­ons and hos­pi­tals should be pri­vately or pub­licly owned.

At Har­vard since 1993, Hart has ar­gued that the in­cen­tives for cost re­duc­tions in pri­va­tized ser­vices, such as pri­vate pris­ons in the United States, are typ­i­cally too strong.

Hart thought his re­search could win him the prize at some point. He said he awoke about 4:40 am and won­dered whether it was get­ting too late to get a tele­phone call.

“Then for­tu­nately the phone rang,” Hart was quoted as say­ing on the of­fi­cial Twit­ter ac­count of the No­bel Prize. “My first ac­tion was to hug my wife, wake up my younger son.”

Holm­strom has stud­ied the set­ting of con­tracts for work­ers from teach­ers to cor­po­rate bosses. He con­cluded that in high-risk in­dus­tries, pay should lean to­ward a fixed salary, while in more sta­ble sec­tors pay should be more bi­ased to­ward per­for­mance re­wards.

Asked at a Cam­bridge, Mas­sachusetts, news con­fer­ence about the cur­rent high level of ex­ec­u­tive pay, Holm­strom said, “It is some­how de­mand and sup­ply work­ing its magic.”

But he said he was con­cerned about the state of in­come dis­tri­bu­tion and the un­hap­pi­ness of many work­ers about stag­nant wages and in­comes.

“I’d much rather live in a so­ci­ety where this wasn’t hap­pen­ing,” he said. “But I’m not pre­pared to speak about the ques­tion about how to re­pair it” be­cause it would mean tin­ker­ing with com­plex mar­kets.

The nine aca­demics who won No­bel prizes this year in medicine, physics, chem­istry and eco­nom­ics in­cluded five Bri­tons, a French­man, a Finn, a Dutch­man and a Ja­panese.

Six of the win­ners, in­clud­ing all five Bri­tons, are based at US uni­ver­si­ties.

MARY SCHWALM / REUTERS

Bri­tish-born eco­nom­ics pro­fes­sor Oliver Hart (left), a pro­fes­sor at Har­vard Uni­ver­sity, and Fin­land-born Bengt Holm­strom, pro­fes­sor of eco­nom­ics and man­age­ment at the Mas­sachusetts In­sti­tute of Tech­nol­ogy, joint win­ners of the 2016 No­bel Prize for Eco­nom­ics, meet with mem­bers of the me­dia in Cam­bridge, Mas­sachusetts on Mon­day.

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