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Why this Nobel Prize for Economics is So Well Deserved

Wednesday, October 12, 2016 9:19
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Me, at MoneyWatch:

Why this Nobel prize for economics is so well deserved: Most people have probably never even heard of “contract theory,” but that’s the specialty that has won Finland’s Oliver Hart and Bengt Holmström this year’s Nobel prize in economics. And as the theory’s name implies, their work helps us understand the contractual relationships between, for example, workers and firms, shareholders and management, businesses and suppliers, and health insurance companies and their customers. 

When should workers be paid a bonus based on performance? What’s the best way to structure the contract specifying the terms for paying a bonus? Should managers have stock options as part of their contracts, or is some other arrangement preferable? When should insurance companies require co-payments, and what’s the best co-pay schedule?

Here’s a way to think about contract theory. …

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