Bengt Holmstöm, 67, the Finnish economist, received the Nobel prize in economic sciences with his UK colleague Oliver Hart on Monday in Cambridge, Massachusetts. Hart and Holmström received the Nobel, which is considered the most prestigious award of intellectual achievement, for their contributions to contract theory. Holmström works currently as a professor of economics at the Massachusetts Institute of Technology. Speaking to reporters in Stockholm by telephone, Holmstrom said he felt very lucky and grateful. “I certainly did not expect it, at least at this time, so I was very surprised and very happy, of course,” he said. The Prize amount is 8 million Swedish krona, which is about 820,600 euros to be shared equally between the Laureates.
Here are ten things you should know about Holmström and his view on economics.
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Contracts are vital in the modern economy. They set out who is allowed to do what with the land they own, the people they employ and the songs they store on their smartphones.
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The best sort of contract, according to the work pioneered by Holmström, is one that provides the right balance of risk and incentives. It encourages top staff to innovate without being reckless.
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In the 1970s Holmstrom showed how a principal, for example, a company’s shareholders, should design an optimal contract for an agent, like the CEO. His “informativeness principle” showed how the contract should link the agent’s pay to information relevant to his or her performance, carefully weighing risks against incentives.
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“This year’s laureates have developed contract theory, a comprehensive framework for analyzing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatization of public-sector activities," the Royal Swedish Academy of Sciences said.
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Holmström's work on employment contracts has considered a range of professions from teaching to management and whether they should be paid fixed salaries or work on the basis of performance-related pay.
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Holmström thinks that the billion-euro cuts in education that the Finnish government is planning to implement during the current term are exceptionally large. "The oddest thing is that financing is cut from the universities that are most successful. The cuts are an intellectual insult against the science community. Apparently, the government is questioning the universities ability to make reasonable decisions in making science," he said in an interview.
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The two of the most important medicines to Finland's economic problems are the renewal of the Finnish employment market and looking after the youth.
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Work should be directed to trades where there is demand. "Why aren't the vacancies good enough for Finns or what is the reason that they are not hiring Finns?" Holmström asked while referring to the construction industry, which is occupied by foreign workers. "If there is real structural unemployment in the construction industry, people should be transferred there where there is a demand for the work force," Holmström said.
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"The internet, robots and the digitalization of businesses are like the laws of nature. One can't stop their development. The more we ban new business models, the more we are left behind," he said.
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Because the population in Finland is getting older, the industry is declining and the economic growth is slow, Finland should focus more on the youth. Holmström refers again to the cuts in education. "If Finland doesn't have intelligent young people who are productive, nobody can't pay the pensions of the elderly population," he said.
[divider]Nobel in a nutshell[/divider]
The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to
Oliver Hart, Harvard University, Cambridge, MA, USA, and Bengt Holmström, Massachusetts Institute of Technology, Cambridge, MA, USA. “For their contributions to contract theory.”
