Oliver Hart, Bengt Holmstrom win Nobel Prize in Economic Sciences for research on contract theory.

• Position: NBER News

Oliver Hart of Harvard and Bengt Holmstrom of MIT, who both have been NBER research associates for more than two decades, were awarded the 2016 Nobel Prize in Economic Sciences for their contributions to analyzing incentives, institutions, and organizations in the field of economics known as "contract theory."

"Contract theory provides us with a general means of understanding contract design. One of the theory's goals is to explain why contracts have various forms and designs. Another goal is to help us work out how to draw up better contracts, thereby shaping better institutions in society," the Royal Swedish Academy of Sciences said in a statement announcing the award. "The contributions of this year's laureates are invaluable in helping us understand real-life contracts and institutions, as well as the potential pitfalls when designing new contracts."

The Academy cited a range of contexts in which contract theory provides key insights for understanding economic behavior and the associated institutions. These include the tradeoff between providing insurance against adverse outcomes and maintaining incentives to take care, designing executive pay contracts that depend in part on corporate performance, deciding how to allocate property rights, and choosing between public and private provision of basic services.

Hart is the Andrew E. Furer Professor of Economics at Harvard, and a research associate in two NBER programs--Corporate Finance and Law and Economics. He has been an NBER affiliate...