Holmstrom’s Nobel Puts Him in Elite Company

The Nobel Prize in economic sciences was awarded Monday to Bengt Holmstrom, a professor at MIT; and Oliver Hart, a Harvard professor, for their work in contract optimization. Regular readers may remember Holmstrom, who we profiled in 2013 when he was awarded the CME Group/MSRI prize for his body of work.

He is not the first economist to win both awards. Holmstrom joins 2014 Nobel winner Jean Tirole, 2011 winner Thomas Sargent, and 2013 winners Robert Shiller and Lars Peter Hansen as MSRI winners who went on to win the Nobel.  The MSRI rewards “exemplary work in the field of mathematical sciences, and recognizes the vital impact quantitative research and application play in shaping global financial markets.” The defining characteristics of the awards differ, but they annually pull from the same pool of elite economists. Holmstrom also sits on the committee that selects each year’s MSRI recipient.

Holmstrom and Hart have contributed decades of research to workplace incentives, an area Holmstrom told us “seemed wide open for modeling and analysis in economics” when he began studying it in the 1970s. Holmstrom’s contribution to understanding employment contract incentives has ranged from insurance contracts to executive compensation, an area he studied in the wake of early-2000s corporate scandals. In those cases, Holmstrom identified the timing of stock options to vesting as an inefficiency in executive pay. Holmstorm is largely responsible for the idea that companies should seek to reward employees where their contributions can be tied to company performance, either through bonuses, options or other means.

Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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