Hongyi Li, UNSW Australia and Anton Kolotilin, UNSW Australia
The Nobel Memorial Prize in Economic Science has just been awarded to Oliver Hart and Bengt Holmström for building the foundations of contract theory.
Contract theory is not merely the study of legally binding contracts. Broadly defined, it studies the design of formal and informal agreements that motivate people with conflicting interests to take mutually beneficial actions. Contract theory guides us in structuring arrangements between employers and employees, shareholders and chief executives, and companies and their suppliers.
In essence, contract theory is about giving each party the right incentives or motivations to work effectively together.
Hart and Holmström have developed elegant and powerful methods that are taught to all students in economics. Their work forms the fundamental building blocks of many areas beyond economics, such as finance, law, public policy and management.
Previously, general equilibrium theory had already…
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Utopia, you are standing in it! 
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