For show­ing how con­tracts work best, pair wins No­bel

Daily Freeman (Kingston, NY) - - NATION+WORLD -

Let in­sid­ers eas­ily cash in stock op­tions, as En­ron did, and you risk see­ing ex­ec­u­tives aban­don a fail­ing com­pany. En­cour­age con­trac­tors to sac­ri­fice qual­ity to cut costs and you might cause prob­lems like those that led the U.S. Jus­tice Depart­ment to phase out pri­vately run pris­ons.

De­sign­ing con­tracts is a tricky busi­ness. For their ground­break­ing work on how to make con­tracts fairer and more ef­fec­tive, Oliver Hart of Har­vard Univer­sity and Bengt Holm­strom of the Massachusetts In­sti­tute of Tech­nol­ogy won the 2016 No­bel prize for eco­nom­ics Mon­day. They will share the $930,000 award for their con­tri­bu­tions to con­tract theory.

Pay pack­ages, Holm­strom’s work sug­gests, are best tai­lored to avoid ei­ther pun­ish­ing or re­ward­ing CEOs for hap­pen­ings beyond their con­trol.

Like­wise, com­pa­nies fare best when they estab­lish pay pack­ages that in­cen­tivize ex­ec­u­tives to pri­or­i­tize the long-term as much as the short-term.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.