Nobel economics : Oliver Hart and Bengt Holmström, two economists close to the company – The World

World | 10.10.2016 at 20h33 • updated 10.10.2016 at 21h11 | By Antoine Reverchon

The “economics prize of the bank of Sweden in homage to Alfred Nobel” (improperly named Nobel economics), was awarded this year to the Finnish Bengt Holmström and the British-American Oliver Hart – who work both in the United States. It is awarded for their theoretical work on the operation of the business, considered as a set of contracts, express or implied, between the parties involved (employer and employee, company and sub-contractors, but also between employee and manager, investor and leader, etc).

Read also : The Nobel prize in economics awarded to Oliver Hart and Bengt Holmström

most of these works date from the late 1970s and 1980s, but, ” although unknown to the general public, they have opened, by different approaches, but ultimately converging, the way to forty years of research in microeconomics “, believes Thomas-Olivier Leautier, researcher at the School of economics of Toulouse, one of the directors of the thesis was: Bengt Holmström.

He has co-authored several papers with Jean Tirole (Nobel for economy 2014), and has been one of the few guests of honor of the French during the delivery of his own Nobel prize in Stockholm.

The company considered as a network of transactions

both are parties of the highlighted by the american economists Robert Akerloff and Joseph Stiglitz, in the 1970s, the asymmetry of the information available to the actors of the economy in their transactions, thereby putting an end to the dogma of the information “perfectly” described by the theory until then.

This observation is also valid at the scale of the enterprise, the enterprise can be considered as a network of transactions, “contracts” taking into account this asymmetry, and not as the result of a ” ideal balance “ between these parties, ” explains Philippe Askenazy, of the School of economics, Paris.

For example, an employer, when recruiting an employee, don’t know what efforts it is going to provide to ensure the task he entrusts to him, just as the employee does not know what means the employer will actually at his disposal. Similarly, neither the one nor the other can foresee the events exogenous to their relationship to start, but that might impact it, such as an illness (the employee’s) or economic difficulties (of the company).

“The contracts” reflect these uncertainties that the two economists have, for their part, sought to model. Their work and of the concrete implications in terms of human resources management, and, more generally, of economic and financial management in the extent to which their models can also be applied to many other transactions of the company (with the regulator or the public authority, with the bankers, insurers, investors, suppliers, etc). Holström has worked, for example, on the remuneration of the company directors by the shareholders ; Hart public-private partnerships, modeling

Limit uncertainty

For Bengt Holmström, born in 1949, and professor at the Massachusetts Institute of Technology since 1994, a contract contains, therefore, by nature of the incentives of each of the two parties aimed at limiting the uncertainty that they impose on one another.

to return To the example of the work, Bengt Holmström shows that, in order to ensure that the employee will perform well in the necessary effort, the employer can use either a salary increase or a promotion, but that the effects will be different depending on the circumstances.

It also strives to model, using game theory, the “contract” optimum “, by showing that if it can improve, thanks to the incentives, the behavior of actors, it may not consider the exogenous factors.

Models simplificateurs

Oliver Hart, born in 1948, and professor at Harvard, had attempted to model the ” contracts incomplete “. Beyond the classic design of the company, who sees it, with the economist Ronald Coase, a node of transaction costs-generating the balance between the parties, Oliver Hart sees it as the institution that allows ” to hold together “ parts so that all the elements and events of their relations cannot, by definition, be known in advance and planned for. Oliver Hart will be based on the analysis of the functioning of the black market in the eastern european countries still under soviet domination, in the measure where prices are not set by the operation of a market ” normal “, but also by the trust and the balance of power between the actors, the possible presence of a third-party influencer, etc

But where Holmström strives to assign a probability to these uncertain events to the model, Oliver Hart strives to model forms of contracts the most ‘robust’ as possible, admitting the inability to integrate the immense field of possibilities.

Thus, for the one as for the other, the contracts reflect the world as it is, and not as economic theory would like it to be. Of course, they all offer two, good theorists, models simplificateurs aimed at optimizing these contracts. “They have , but these models have largely paved the way for countless works of microeconomics to cross these models with the available data to better understand the heterogeneity of firms and their operation.