Holmström, Bengt << HOHLM struhm, BANGT >> (1949-…), a Finnish economist, won the 2016 Nobel Prize in economic sciences. Holmström shared the prize with the British-born American economist Oliver Hart for their development of contract theory. Contract theory is a comprehensive framework for analyzing issues involving the types of contractual relationships people encounter in everyday life. Such issues include performance-based pay for top executives, insurance deductibles and co-payments, and the privatization of such public-sector institutions as hospitals, schools, or prisons.
Holmström and Hart analyzed problems involving various kinds of contracts. Their work focused on ensuring that contracts are properly designed to help individuals, businesses, and other institutions determine whether the agreements that bind them together are in their best interest. The Royal Swedish Academy of Sciences in Stockholm, Sweden, announced the prize, noting that “modern economies are held together by innumerable contracts.” The academy said the “new theoretical tools” that Holmström and Hart created on how to write contracts are “valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design.”
Bengt Robert Holmström was born on April 18, 1949, in Helsinki, Finland. He earned a bachelor’s degree from the University of Helsinki. He received a master’s degree in 1975 from Stanford University in Stanford, California, and a Ph.D. degree in 1978 from Stanford’s Graduate School of Business. Holmström began his research on contract theory in the 1970’s. He demonstrated the way a contract between a company’s shareholders and its top executives should be designed to most clearly indicate how performance is linked to pay incentives. He later generalized his research to link employee performance to pay and potential promotion incentives.
Holmström joined the faculty of the Sloan School of Management at the Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts, in 1994. In 1997, he became the Paul A. Samuelson Professor of Economics at MIT, where he served as the head of the economics department from 2003 to 2006. Holmström also was a longtime member of the board of the Finnish telecommunications giant Nokia Corporation.
