A Nobel Theory

Photo: L. Barry Hetherington/MIT Economics

There are some things money can’t buy. Occasionally among them: effective contracts. Bengt Holmström, MS ’75, PhD ’78,and colleague Oliver Hart received the 2016 Nobel Memorial Prize in Economic Sciences for their pioneering work in contract theory, which has changed how economists and business leaders think of incentives. “Sometimes no financial incentive is the best incentive,” said Holmström, a professor of economics at MIT, in an interview with Nobel Media. 

An expert on employment contracts, Holmström has suggested in his work that businesses peg executive pay to the performance of the firm relative to the market as a whole. “Incentive design is tied to occupation design,” Holmström explained in an email to Stanford. “High-powered financial incentives can be detrimental within firms.” 

His win brings Stanford’s count of economics laureates to 13. Past winners with Stanford affiliations include Alvin Roth, MS ’73, PhD ’74, Milton Friedman and Kenneth Arrow.