The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to
Oliver Hart
Harvard University, Cambridge, MA, USAand
Bengt Holmström
Massachusetts Institute of Technology, Cambridge, MA, USA“for their contributions to contract theory”
Society’s many contractual relationships include those between shareholders and top executive management, an insurance company and car owners, or a public authority and its suppliers. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions. This year’s laureates have developed contract theory, a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.
In the late 1970s, Bengt Holmström demonstrated how a principal (e.g., a company’s shareholders) should design an optimal contract for an agent (the company’s CEO), whose action is partly unobserved by the principal. Holmström’s informativeness principle stated precisely how this contract should link the agent’s pay to performance-relevant information. Using the basic principal-agent model, he showed how the optimal contract carefully weighs risks against incentives. In later work, Holmström generalised these results to more realistic settings, namely: when employees are not only rewarded with pay, but also with potential promotion; when agents expend effort on many tasks, while principals observe only some dimensions of performance; and when individual members of a team can free-ride on the efforts of others.
In the mid-1980s, Oliver Hart made fundamental contributions to a new branch of contract theory that deals with the important case of incomplete contracts. Because it is impossible for a contract to specify every eventuality, this branch of the theory spells out optimal allocations of control rights: which party to the contract should be entitled to make decisions in which circumstances? Hart’s findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law. His research provides us with new theoretical tools for studying questions such as which kinds of companies should merge, the proper mix of debt and equity financing, and when institutions such as schools or prisons ought to be privately or publicly owned.
The Economics Nobel Isn’t Really A Nobel
The Economics Nobel Isn’t Really A Nobel according to Maggie Koerth-Baker at FiveThirtyEight.com.
But, technically, there is no Nobel Prize in economics.2 Instead, there is the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. It was first awarded in 1969 and is named not after a person, but after the central bank of Sweden — the Sveriges Riksbank — which funds it. The Nobel Foundation doesn’t pay out the award or choose the winner (though the winner is chosen in accordance with the same principles used by the Nobel Foundation), but it does list the prize on its website along with the Nobels, tracks winners the same as Nobel laureates, and even promotes the prize alongside its own. Members of the Nobel family have spoken out against the award.
So why does it exist? Notre Dame historian Philip Mirowski has found evidence that the economics award grew out of Swedish domestic politics. According to Mirowski, in the 1960s, the Bank of Sweden was trying to free itself from government oversight and become independent. One way to do that was to frame economics as purely scientific, rather than political — in which case, government interference could only hurt the bank. Having a Nobel Prize boosted economics’ scientific street cred. And Mirowski isn’t the only academic who is skeptical of whether there should be a Nobel-associated economics prize. Friedrich von Hayek, who won the award in 1974, used his Nobel Banquet speech to critique the prize.3 “The Nobel Prize confers on an individual an authority which in economics no man ought to possess,” Hayek said. He worried that the prize would influence journalists, the public and politicians to accept certain theories as gospel — and enshrine them in law — without understanding that those ideas have a different level of uncertainty than, say, gravity or the mechanics of a human knee.
Obama on Mars
Obama continues to write op-eds at a furious pace.
We have set a clear goal vital to the next chapter of America’s story in space: sending humans to Mars by the 2030s and returning them safely to Earth, with the ultimate ambition to one day remain there for an extended time. Getting to Mars will require continued cooperation between government and private innovators, and we’re already well on our way. Within the next two years, private companies will for the first time send astronauts to the International Space Station…
The next step is to reach beyond the bounds of Earth’s orbit. I’m excited to announce that we are working with our commercial partners to build new habitats that can sustain and transport astronauts on long-duration missions in deep space. These missions will teach us how humans can live far from Earth — something we’ll need for the long journey to Mars.
leading implementation of complex programs
This is just something I have wanted to write down a few thoughts on for awhile. My field is engineering and planning, and I have been involved in a number of programs that are complex technically, financially, and on the people side. I’ve seen some things done well, I’ve seen some things done badly, and I’ve done a few things well and learned a few lessons the hard way myself. So here are my thoughts:
- Organize the entire program around achieving a vision and set of goals which everyone understands. Create a crystal clear vision and set of goal statements for the program. Make sure these are thoroughly understood by all senior and mid-level decision makers – communicate, market, train, drill, test – whatever it takes to make sure they get it. Then, set specific objectives for individual functional units within the organization, and for all individual staff members, that advance these goals, all these goals and only these goals. Make each objective SMART – specific, measurable, achievable, realistic, and time bound. Then track every individual’s and every unit’s progress towards meeting the objectives, and hold individuals and managers accountable for meeting their objectives.
- Make sure the knowledge level of the entire staff is up-to-date with industry standards and best practices, then encourage system thinking, creativity and innovation to advance the leading edge. Create a formal training and continuing education program for staff. Create a psychological “safe space” for discussion of ideas that are outside the typical daily functions of the organization. Organize talks, discussion groups, and other events. Bring ideas and speakers in from outside the organization. Encourage and reward staff to spend time reading and attending events outside the organization, then bringing back ideas and communicating them to colleagues. Be on guard for the development of group think, and actively encourage and reward the sharing of ideas that are new to the organization.
- Focus on communication of system behavior, risk, and other complex information. Continuously improve staff knowledge of communication approaches, strategies, and tools by weaving these into the training and innovation program. Bring in specialized staff with communication and visualization skills. Set up a specific job role, group or committee whose job it is to oversee communication approaches in all aspects of the organization.
Paul Romer and the Nobel Prize
I write this the night before the 2016 Nobel prize in economics is scheduled to be awarded. By the time this posts it will have been awarded, so keep that in mind if what I say below seems outdated the second it posts.
City Observatory says Paul Romer deserves to win the Nobel Prize in economics.
In our view, the academy might want to closely consider giving the award to Paul Romer, recently appointed to be the chief economist for the World Bank, for two reasons.
First, in a series of papers published a couple of decades ago, Romer was responsible for some of the key breakthroughs in what is called “New Growth Theory,” which re-writes the mechanics of long-term economic growth in a fundamental and optimistic way. We described the key insights from of these theories a couple of months ago at City Observatory. Romer’s long been short-listed for the prize on account of this work, awaiting it seems, only sufficient quantities of gray hair to take his turn.
Second, in the past few weeks, Romer has turned the economic world on its head with a scathing critique of deep flaws in the past two decades of macroeconomic theorizing. In a paper entitled, “The Trouble with Macroeconomics,” Romer indicts the state of macroeconomics, and its growing detachment from the real world.
I happen to like Paul Romer. I saw him speak in person a few years ago and thought he was impressive. His message that human knowledge and creativity drives long-term improvements in the quality of our lives is a hopeful one in a world where we can’t just keep extracting, consuming, and dumping more and more forever.
election poll
In the most important poll of the U.S. election season, 65% of kids say they do not want to be President when they grow up.
grilled pizza
In my quest for interesting vegetarian recipes, I continue to be intrigued by the idea of grilling pizza. Recently, I threw some left over pizza on the grill and it turned out really tasty. I can’t believe I never thought of it before. But let’s be honest, throwing some grilled meat on there would also taste pretty good, too.
“artificial rainforest” in Dubai
I continue to think that places like Dubai and Singapore with extremely inhospitable climates are preparing humanity for its future in space. They are creating cities that consist of climate-controlled high rise apartments, office buildings, malls, and indoor parks, all connected by subway lines, so there is really no reason to go outside. It’s not too hard to imagine transferring one of these cities to Mars.
the latest from James Hansen
James Hansen and an enormous number of co-authors have a new paper in Earth System Dynamics.
Young People’s Burden: Requirement of Negative CO2 Emissions
The rapid rise of global temperature that began about 1975 continues at a mean rate of about 0.18 °C/decade, with the current annual temperature exceeding +1.25 °C relative to 1880–1920. Global temperature has just reached a level similar to the mean level in the prior interglacial (Eemian) period, when sea level was several meters higher than today, and, if it long remains at this level, slow amplifying feedbacks will lead to greater climate change and consequences. The growth rate of climate forcing due to human-caused greenhouse gases (GHGs) increased over 20 % in the past decade mainly due to resurging growth of atmospheric CH4, thus making it increasingly difficult to achieve targets such as limiting global warming to 1.5 °C or reducing atmospheric CO2 below 350 ppm. Such targets now require “negative emissions”, i.e., extraction of CO2 from the atmosphere. If rapid phasedown of fossil fuel emissions begins soon, most of the necessary CO2 extraction can take place via improved agricultural and forestry practices, including reforestation and steps to improve soil fertility and increase its carbon content. In this case, the magnitude and duration of global temperature excursion above the natural range of the current interglacial (Holocene) could be limited and irreversible climate impacts could be minimized. In contrast, continued high fossil fuel emissions by the current generation would place a burden on young people to undertake massive technological CO2 extraction, if they are to limit climate change. Proposed methods of extraction such as bioenergy with carbon capture and storage (BECCS) or air capture of CO2 imply minimal estimated costs of 104–570 trillion dollars this century, with large risks and uncertain feasibility. Continued high fossil fuel emissions unarguably sentences young people to either a massive, possibly implausible cleanup or growing deleterious climate impacts or both, scenarios that should provide both incentive and obligation for governments to alter energy policies without further delay.
the gates of hell
It’s October, time for a Halloween-related post or two. Here’s an interesting article on 11 places rumored to have entrances to the underworld. Most seem to be in exotic places, but it’s nice to see central Pennsylvania represented. I do think they have overlooked Centralia, Pennsylvania though, where people have been known to literally fall into pits of unquenchable underground fire. It is interesting that a wide variety of cultures and religions, from the Ancient Greeks and Romans to Christians and Buddhists and other Asian traditions, have had somewhat similar concepts of an underworld.