Contracts, Incentives and Organizations: Hart and Holmstrom Nobel Laureates

27 Pages Posted: 15 Jun 2017

See all articles by Vladimir Smirnov

Vladimir Smirnov

The University of Sydney - School of Economics

Andrew Wait

University of Sydney

Date Written: June 2, 2017

Abstract

This article reviews the contribution of Hart and Holmstrom, the 2016 Nobel Laureates in economics. Holmstrom's work on the principal-agent problem answered questions as to what should (and should not) be included in an incentive contract. His work helped explain the simple structure of incentive contracts we typically observe in the real world. The models he developed have been used to address questions of CEO compensation, organizational design and optimal regulation. A key element of Hart's research focused on the question of what are the optimal boundaries of a firm (and indeed, what a firm actually is). In doing so he developed the incomplete-contracts framework, which has subsequently been used to explain many economic phenomena whenever renegotiation is important, including authority and decision-making structures in firms, why financial contracts look the way they do, and various questions in international trade and public policy.

Keywords: contracts, incomplete contracts, boundaries of the firm, incentives, moral hazard, financial contracts

JEL Classification: D23, L22, L23

Suggested Citation

Smirnov, Vladimir and Wait, Andrew, Contracts, Incentives and Organizations: Hart and Holmstrom Nobel Laureates (June 2, 2017). Available at SSRN: https://ssrn.com/abstract=2985938 or http://dx.doi.org/10.2139/ssrn.2985938

Vladimir Smirnov

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
The University of Sydney
Sydney, NSW 2006 2008
Australia

Andrew Wait (Contact Author)

University of Sydney ( email )

School of Economics
University of Sydney, NSW 2006
Australia
+61-2-9351-3060 (Phone)
+61-2-9351-4341 (Fax)

HOME PAGE: http://sydney.edu.au/arts/economics/

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