Old joke well-known to economists, who have always cultivated the self-deprecating : “It works in practice, ok, but does it work in theory ?” The price of 2016 Bank of Sweden in economic science in memory of Alfred Nobel (refers to improperly as the “Nobel economics”, and which is accompanied by a gift of nearly 900,000 euros) will not give too much grain to grind at those who laugh at this through.
The Nobel prize in Economics, an instrument of propaganda of neoliberalism
The two economists that have received Monday, the british-American Oliver Hart (age 68, Harvard), and the Finnish Bengt Holmström (67 years, MIT) are interested only in what works in practice”. Or, in the words of Justin Wolfers (University of Michigan), a former student of Hart’s, who was looking forward to the new on his Twitter account, the “reality is messy”, full of “imperfections”. Last year already, it was an economist who has specialized on this “camboui” of the company, which had been crowned : the Frenchman Jean Tirole.
Jean Tirole : “liberalism is not laissez-faire”
The economy : the nodes of contracts
Hart and Holmström have been rewarded for their contribution to the “theory of contracts” in which they are in part responsible. It is about exploring the relationship is the most basic, but also the most important in the economy : one that binds a buyer and a seller, a giver and a doer, a shareholder, and the management of a company, etc., As summed up by Olivier Sautel, a specialist in industrial economics and vice-president of Microeconometrix :
“All organisations and institutions can be considered as nodes of contracts. Contract theory seeks to understand the incentives of different actors, and how the emergence of hierarchies.”
In the contractual relationship, the interests sometimes converge, sometimes conflict with each other ; often a mixture of the two. It is governed by rules and institutions (property rights, for example) and a player can dominate the other for various reasons. The interest of the economy is to ensure that contracts are of benefit to all.
Bengt Holström has worked in the 1970s on the question of the relationship between the shareholders of the company and its leaders. What is the proper remuneration of these, to better fulfil the objectives set by the first ? What bonuses predict if one wishes to promote the long-term ?
The headache of contracts “incomplete”
Olivier Hart, him, is interested in the 1980s the problem of “contract incompleteness”, in the wake of the work of Oliver Eaton Williamson, another Nobel. The contracts are almost all “incomplete” in the sense that they cannot anticipate all future situations. Which raises the question of the risk of having to renegotiate. This reflection on the contract that are incomplete are born different options in terms of organization.
let’s Take the example of a company in search of a certain provision. If it is simple and has no reason to change (a piece of plastic, for example), it is possible to go with a subcontractor, a contract quite “complete” : description of the piece, prices indexed on oil, delivery terms, etc., But in other situations (a product designed to evolve, for example), the risk of renegotiation is such that the company may be interest to integrate its supply, to remain master of its decisions. Addition, the contract promises to be “incomplete”, the less it is interesting to go through an outside service provider.
Two friends
“For Hart, in unforeseen situations, it is necessary to give the outline control to the one who owns the physical assets,” says Olivier Sautel. “But this vision is hardcore has been called into question by those who argued that the human capital of [the know-how, talent, skills] is more important than physical capital : the possession of computers or offices does not give special power on the performers. Bengt Holmström is more interested in the question of human capital.”
The research of the two men led to developments in various areas : which companies have interest to merge ? It is interesting to privatise institutions such as schools or prisons ? Their differences of approach does not prevent the two new Nobel agree very well. They have even written a book together in 1987, “The Theory of Contracts” (Cambridge University Press). “Oliver Hart, I am so happy to have won the prize with him, this is my best friend”, was delighted Holmström Monday.
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