This year's Nobel Prize in Economic Sciences was awarded to U.S.-based economists Oliver Hart and Bengt Holmstrӧm for their research to better understand how contracts are designed.

Hart, a London-born Harvard University economist who was AEA vice president in 2006, was named Monday morning along with MIT professor Holmstrӧm as the 2016 recipients of the award from The Royal Swedish Academy of Sciences. Holmstrӧm, a native of Finland, served on the AEA nominating committee 2001-02.

Oliver Hart

Bengt Holmstrӧm

Both economists helped lay the foundation for contract theory, which provides a comprehensive framework for analyzing diverse issues in contractual design, from performance-based pay for top executives to car insurance contracts.

"Through their initial contributions, Hart and Holmstrӧm launched contract theory as a fertile field of basic research," the Academy said in a statement announcing the award Monday. "Over the last few decades, they have also explored many of its applications. Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions."

The Academy said Hart and Holmstrӧm over the past few decades have contributed valuable insights to understanding how contracts should be properly designed to ensure that they are mutually beneficial to all parties. In the late 1970s, Holmstrom demonstrated how a "principal," or company’s shareholders, should design an optimal contract for the firm's CEO. In the 1980s, Hart "made fundamental contributions" to a new branch of contract theory that deals with the important case of incomplete contracts, the Academy said.

The announcement can be read here: https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2016/press.pdf