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Economist Bengt Holmström’s Nobel Prize win delights MIT colleagues

Faculty members in SHASS and Sloan cite his transformative work on contract theory.
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MIT's newest Nobel laureate, Bengt Holmström
MIT's newest Nobel laureate, Bengt Holmström
Photo: Bryce Vickmark

On Monday, Bengt Holmström, the Paul A. Samuelson Professor of Economics at MIT, won a share of the 2016 Nobel Memorial Prize in Economic Sciences with Oliver Hart, a professor and economist at Harvard University. Holmström, a faculty member in the Department of Economics in MIT's School of Humanities, Arts, and Social Sciences (SHASS), holds a joint appointment in the MIT Sloan School of Management. Calling his work “pathbreaking,” Holmström’s colleagues are lauding the decision by the Royal Swedish Academy of Sciences.

“MIT has a long and rich tradition of having distinguished economists both on the faculty and amongst its graduates. Nothing is more fitting than having Bengt receive the Nobel Prize, won earlier by Paul Samuelson, who built the MIT economics department to its current greatness and whose professorship Bengt now holds,” said MIT Sloan professor of finance Stephen Ross, a longtime colleague and friend of Holmström’s.

The Swedish Academy cited Holmström and Hart for “their contributions to contract theory.” In the late 1970s, Holmström, who has held a joint appointment with MIT Sloan and the MIT Department of Economics since 1994, demonstrated how contracts should be designed to weigh risks and incentives, as well as how they should link pay to performance.

Melissa Nobles, the Kenan Sahin Dean of SHASS, said that the school faculty were “very proud to celebrate Bengt Holmström’s pioneering economics research. Bengt’s foundational research in contract theory, which has provided practical tools for many areas of modern society, represents MIT’s profound commitment to basic research that can generate new and deep understandings of the human complexities — the political, cultural, and economic realities that shape our existence. Bengt has been a much-admired member of our Department of Economics since 1994, and on behalf of the entire MIT SHASS community, I want to wish him and his co-winner, Oliver Hart, our warmest congratulations.”

David Schmittlein, dean of MIT Sloan, said: “Professor Holmström's work holds real insights for business leaders everywhere, in every industry. He continues a long tradition of inventive economic thinking at MIT, and his ideas remain central to how we think about contracts and employee incentives. I know the faculty at MIT Sloan joins me in congratulating Professor Holmström and Professor Hart on this signature achievement.”

Groundbreaking work

“If there is any surprise about Bengt Holmström's Nobel Prize, it is the timing — that it has taken the committee so long to recognize his towering contributions,” said Daron Acemoglu, the Elizabeth and James Killian Professor of Economics, and a colleague of Holmström’s in the MIT Department of Economics. “This is a testament to the influence of Bengt's work on contracts, incentive theory and the internal organization of the firm, which has fundamentally reshaped not just the way we think about these topics but the entire field of economics.”

“Contract theory is a pathbreaking approach to a whole host of fields in economics and in law. Almost all human interactions in economics can be characterized as contractual – either implicit or explicit,” Stephen Ross said. “Bengt and Oliver built on this intuitive insight and developed a set of models and results that allow us to clearly understand their economics from the perspective of the incentives of agents and the information they possess.” The theories developed by Holmström and Hart, Ross added, have provided a framework that enables an understanding of a broad swath of problems, from labor market interactions to the relationship between owners and enterprises to the role of control rights.  

Holmström’s work has “provided economists with a new framework to think about the role that incentives play in shaping the behavior of employees and how they interact within complex economic organizations,” said MIT Sloan professor of finance Antoinette Schoar. “The modern economy is dominated by ever larger and more decentralized firms, where incentive contracts are key in ensuring the successful coordination of the workforce.”

Professor of finance David Thesmar, who joined the MIT Sloan faculty from HEC Paris this year, has studied Holmström’s research for years, and said: “I have read, taught, and done research on many of Bengt’s papers, as he is a founding father of contract theory. His insights on relative performance evaluation, the notion of liquidity, and career concerns are essential to our understanding of organizations and finance.”

“Holmstrom's pathbreaking work created some of the most widely-used tools in every economist's toolkit,” said Jim Poterba, the Mitsui Professor of Economics in the Department of Economics, and president of the National Bureau of Economic Research. “His insights on incentive theory and contract design informs topics that range from the creation of pay structures for corporate managers, to the design of health insurance exchanges, to the sharing of risks between banks and other large financial institutions. Bengt and Oliver Hart have not only helped us to better understand incentives and institutions, but also to design better ones.”

MIT Sloan professor of applied economics Robert Gibbons, who has worked closely with Holmström for years, said his work is “vitally important” for both economics and management. “I think of contract theory as analyzing how to govern collaboration — how to use all the available instruments to help a fixed set of people collaborate as well as possible. Applications range from small work groups and partnerships, to tussles between divisions of corporations, to joint ventures and other interactions between firms, to public-private partnerships between firms and governments, to interactions between countries or other autonomous entities,” Gibbons said. “I'm delighted that economics has added these issues to its agenda, to complement the analysis of markets. Bengt's decades of award-winning work played a key role in getting this started.”

“It's been tremendous to have been Bengt's friend and colleague for the past 22 years,” said Glenn Ellison, the Gregory K. Palm (1970) Professor of Economics at MIT and current head of the Department of Economics. “He is a remarkable economist. And he has also been a remarkable contributor to the department in so many other ways: He was a dedicated department head; he taught innovative graduate and undergraduate classes; he worked with a number of our top PhD students; he cared greatly about his undergraduate advisees. The prize could not be more deserved and the MIT economics department could not be happier for Bengt.”

Applying contract theory to management practice

MIT Sloan Professor Scott Stern said Holmström’s “clear and deep understanding of how to bring economic theory to bear on the core challenges facing managers has been an inspiration and a guide.”

“Consider the challenge of motivating ‘innovation,’” Stern said. “How can you tell when your worker is someone [who] is working hard at innovation? This is, needless to say, not an easy problem. Bengt provided the foundational stepping stones that inform our teaching and research in this area. In a series of classic papers, Bengt highlighted how difficult it is to provide incentives that actually encourage the behavior that managers are hoping to encourage. For example, if you are constantly monitoring the progress of innovators, you are likely to end up with a lot of short-term deliverables but few home runs.”

“Bengt’s pioneering work pervades our teaching and our research,” Stern said.

A focus on research

Although the accolades and the Nobel Prize are gratifying, Holmström said in a phone interview Monday that he is looking forward to getting back to his research.

“I don’t have any intention to use this as a platform for throwing myself into a public debate. There are various styles of reacting to [winning] the Nobel Prize. Some people become experts on everything when they get the prize, and others continue to be themselves, so to speak. I think I will be more of the latter,” Holmström said.

Ross said his friend’s attitude doesn’t surprise him at all. “Given his talents, Bengt is an uncommonly modest man,” he said.

Acemoglu agreed: “I honestly cannot think of a more well-deserved prize. And the icing on the cake is that giving the lie to the saying 'nice guys finish last.’ Bengt, who is one of the kindest, most considerate and selfless individuals you would meet in academia, has finished first as he richly deserves.”

MIT Sloan Professor Robert C. Merton, who won the Nobel Memorial Prize in Economic Sciences along with Myron Scholes in 1997, said he was “extraordinarily excited” Holmström won the prize.

When asked if it will change Holmström’s life, Merton said, “yes and no.”

“He will forever have access [to meet more people], but I suspect he’ll go right back to doing his research. He’s known [around the world] already, so this will just add to it,” Merton said.

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