[Curator’s note: The following material quotes and paraphrases extensively from articles posted by the Nobel Prize Committee.]
The Sveriges Riksbank Prize in Economic Sciences/Nobel Prize for Economic Science: 2016
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 was awarded jointly to Oliver Hart and Bengt Holmström "for their contributions to contract theory."
Contracts play a fundamental role in society and the economy. They can protect against uncertainty and contribute to cooperation. Oliver Hart has developed theories on contracts. In the mid-1980s, he contributed to the theory of incomplete contracts. Since it is not possible to specify every eventuality in a contract, the right to make decisions under different circumstances should be assigned in an optimal manner. These analyses have been significant for, among other things, governance of companies and the design of laws and institutions.
Oliver Hart was born in London in October 9, 1948. His parents were both doctors. His mother was a gynecologist at a time when women doctors in the U.K. were relatively uncommon; she was a German-born Jew, who had left Germany in 1933 just after Hitler came to power. His father was an epidemiologist of some distinction whose particular interest was TB. He also was one of the key players in the 1948 Streptomycin trial, which put randomized control trials on the map. He came from a long-standing Anglo-Jewish family.
Oliver lived in comfortable but by no means luxurious middle class circumstances in the Hampstead area. He was an only child. His parents had had a son about a year before who died a few hours after being born, and so his arrival was particularly welcome. Perhaps because of this he indicates his parents were quite protective. His father was 48 when he was born – very old for a father at the time – but he lived to 106. His mother died at 93. He had a close and loving relationship with both of them.
King’s College Cambridge education
At age 17, I was admitted to King’s College Cambridge. I had hoped to win some sort of scholarship, which although not worth much was prestigious and guaranteed that one’s name was memorialized on a wall at my school. But that did not happen. The senior tutor at King’s at the time thought that I would be better off not continuing with mathematics – that was for “Rolls-Royces,” I recall him saying – but, stubborn as ever, I ignored his advice and spent the next three years studying for a mathematics degree, which given the Cambridge system meant doing nothing but mathematics.
King’s was an exciting place to be in the late 1960s. The students were a gifted group. Among the people I knew well in my class, either then or later, were Mervyn King (later to be Governor of the Bank of England), Martyn Poliakoff (a cousin of mine, and a distinguished chemist and foreign secretary of the Royal Society), Ben Friedman (a colleague now in the Harvard economics department), and Tony Judt (the historian, who sadly is no longer with us). Unfortunately, King’s was all male at the time, which postponed my feeling comfortable with women even further.
I graduated at a time of student rebellion and the idea of a job did not seem attractive. The answer was, of course, further study. But in what? People told me that mathematics was being used in economics, and I had a second reason for choosing that field. I was quite left-wing at the time and liked to argue about politics. But I found that at some point my fellow-debaters brought in some consideration like the balance of payments and at this point I lost the argument. Clearly I had to learn something about this field.
So study in economics it was, and I applied and was admitted to a master’s program at Warwick University. Economics was refreshingly different. Since it was still a relatively new field, one felt that the frontiers were not that far away (this is less true nearly fifty years later). Names and dates were thrown around all the time. I liked this and felt an immediate affinity with the subject. I learned macroeconomics from Dick Sargent, international economics from John Williamson, and mathematical economics from Richard Clarke (who sadly died young). Some of the mathematics that had seemed very dry seemed much less so when I saw how it could tie in with the world.
Princeton Graduate Program
In my second year I started to think about what to do next. John Williamson, who had a Ph.D. from Princeton, encouraged me to consider graduate work in the U.S. I had worked in New York for a few weeks in the summer of 1970 and toured some of the country with a friend by Greyhound bus, and the idea of spending more time there was appealing. So I decided to apply. In those days I was not very well organized and by the time I put in my applications it was close to the deadline, and, by bad luck, a postal/mail strike in the U.K. had just started. In those days there was not much alternative to regular mail and so my applications were destined to languish for weeks.
But then John Williamson made a wonderful suggestion. He was going to Princeton for a few days, and he offered to take my application by hand. A few weeks later I heard – the postal strike was now over – that I had been admitted to Princeton and offered a decent financial package. I also received responses to my snail (almost literally)-mail applications. I think that I was admitted by Penn but I was rejected by MIT, Harvard, and Yale.
So in September 1971 I arrived in Princeton. I remember immediately liking the place. Yes, it was mock Oxbridge, but it was also beautiful. And I liked the steamy, hot weather. It made such a change from the almost non-existent summer in England (global warming has changed things a bit). As soon as classes started I also realized that the Princeton canvas was bigger than what I had experienced before in economics. There were many more fields covered, the faculty was larger and more diverse. It was exciting.
Perhaps the biggest difference between Princeton and anywhere I had been before was the Graduate College. Built like an Oxford or Cambridge college, and located a mile or so from the main campus, this was where many of the graduate students lived and, amazingly, there were both men and women. So Princeton came with a rather pleasant social life. One met one’s fellow students from many fields over dinner, which was quite good particularly compared with British student fare of the time. There was a certain formality – gowns had to be worn – but the atmosphere was anything but.
One of my fellow graduate students was Rita Goldberg *79, who was studying comparative literature (and who later successfully got the college to abandon gowns!). We became a couple in the spring of 1972, married in 1974, and have been together ever since. We now have two sons, Daniel and Benjamin, two grandsons, Gabriel and Jamie, and a daughter-in-law, Ellen. So I have very fond memories of the Graduate College and of Princeton!
I made many friends at Princeton, some of whom I still see or am in touch with. Although the department was not as strong as today, there were some very good students and faculty. I found that my background in mathematics and my exposure to mathematical economics at Warwick helped me to navigate the program and I was able to finish all my exams after one year in spring 1972. Early on I linked up with one of the professors, Dwight Jaffee. He was looking for a research assistant and I volunteered. We ended up writing a paper together on financial intermediation – my first publication. In the fall of 1972 Michael Rothschild arrived from Harvard as a professor. This was a hugely important event for me. Before Mike’s arrival I was not really aware that there was an area called economic theory that was distinct from mathematical economics. This was the time when work in asymmetric information was at its peak and Mike was of course a central figure. For me it was an eye-opener to see the same degree of rigor that I was familiar with from general equilibrium theory (which I had learned from Richard Cornwall) being applied to “small” models.
But I did not at the time pursue the small model path. I had become interested in the question of the objective function of a firm. What is the generalization of profit maximization in a world of uncertainty? This led me to the theory of general equilibrium with incomplete markets and I became aware of an important paper by Peter Diamond on the efficiency of a stock market economy. At some point I realized that Diamond’s results did not generalize once one moved beyond the two-period, one-good economy that he had considered. I think that this must have been in the early fall of 1973. From one day to the next I had (the main part of) my thesis. Of course, it took some time to work out the details and write it all up, but I was on my way as a researcher. I received my Ph.D. in 1974.
I have jumped over an important episode. Mike Rothschild was a very supportive advisor and, given that there were few theorists or mathematical economists at Princeton, he thought that I would benefit from attending a six week (or so) summer workshop in mathematical economics at the University of Massachusetts organized by Hugo Sonnenschein. Hugo was kind enough to invite me and in the summer of 1973, Rita and I moved up to Amherst. It was the time of the Watergate hearings and the two of us watched the proceedings on TV in the evenings after I had attended the conference sessions during the day. This was the first conference that I had been to as a nascent researcher and the experience was wonderful. Many interesting papers were presented by many interesting people, and I lapped it all up.
I even presented a paper at the summer workshop. It was some joint work with Harold Kuhn on a proof of the existence of equilibrium without the free disposal assumption (later published in the Journal of Mathematical Economics). Harold had a joint appointment in the mathematics and economics departments at Princeton, and was another important influence on me. He was a mesmerizing teacher and it was exciting to work with him even though what we produced had no great significance.
Returning to England
In the fall of 1973 I started looking for a job. My parents had been pushing me to return to England and Rita, who was still working on her Ph.D. thesis, and I decided to try it out. U.K. universities did not have a presence in the U.S. job market in those days, and so candidates had to apply individually for positions. Michael Rothschild knew Tony Atkinson, a professor at Essex University, well, and I applied and was offered a job there. So in September 1974 Rita and I decamped to Wivenhoe and I started teaching at Essex in October. The department at Essex was quite good – as well as Tony, Christopher Bliss, Ken Burdett and Peter Phillips were colleagues (so was Peter Hammond, but he was away that year) – but morale was not high. This was partly because U.K. universities were going through bad times (these only got worse over the subsequent ten years), but also because Essex had a reputation dating back to the 1960s as a bastion of left-wing student activity, which did not put it in good stead with the funding authorities.
In the summer of 1974, I had met Frank Hahn at a summer workshop at Stanford, and he wrote to me and said that there was an assistant lecturer position at Cambridge and would I like to apply. Given the uncertain situation at Essex I decided to do so, and got the job. Rita and I moved to Cambridge in September 1975 and that was our home for the next nine years or so. I also became a Fellow of Churchill College.
Returning to Cambridge was interesting, exciting and enjoyable in many ways. First, I was going back in a different field and to a different college compared with my undergraduate days. Second, given its status and the college system, Cambridge was better able to withstand the poor economic climate than most other U.K. universities. Third, although the faculty was divided into different economic camps (neoclassical, Marxist, neo-Ricardian, etc.), Frank Hahn had managed to assemble a small, but superb, group of theorists around him, including David Newbery and Roger Witcomb as regular teaching staff, and Douglas Gale, Eric Maskin, David Kreps, Louis Makowski and Mark Machina as research fellows or visitors. So there was constant discussion of ideas and the intellectual environment was extremely stimulating. The period 1975–1981, when I taught at Cambridge first as an assistant lecturer and then as a lecturer, was one of the most exciting of my life.
A major intellectual event in my life occurred in 1976 when I attended the IMSSS summer workshop at Stanford (for the second time). Mordecai Kurz, who ran the workshop, decided that it would be good to have a session on finance, and designated Sanford Grossman and me to run it. I had met Sandy briefly in 1975, and knew that he was a wunderkind, but that was our only contact up to that point. Sandy and I worked on many topics, including the objectives of firms, takeovers, capital structure, and the principal-agent problem before embarking on work on incomplete contacts, the topic for which I have been awarded the prize.
Sandy was intellectually mature beyond his years and I learned a great deal from him, particularly about the Chicago approach to economics. Sandy is one of the most brilliant people I have ever met. At some point he decided that he wanted to apply his economic ideas in the financial world and he has been extremely successful at that, but I feel that his departure was a great loss for economics.
Promotion in the Cambridge economics faculty was almost impossible in the late 1970s and early 80s, partly because the faculty could not agree on anything. At some point it was time to move on and I was offered and accepted a professorship at the London School of Economics. I started teaching there in January 1982 but continued to live in Cambridge. Commuting was not easy. As I started my new job there was a national rail strike.
It felt good to have a senior position and L.S.E. was a stimulating place to be. Among my colleagues were Tony Atkinson, Partha Dasgupta, Christopher Pissarides, Ken Binmore, Richard Layard, and David de Meza. While giving a seminar at L.S.E. shortly before I arrived, I met John Moore, who was finishing his Ph.D. there. In 1983 we started to work together. Meeting and working with John has been the second great intellectual event in my life. Over a roughly 25-year period we continued the work on incomplete contracts that I had started with Sandy, taking it in new directions, including foundations, corporate finance, and the introduction of behavioral elements. John is a brilliant economist, with an extraordinary mathematical mind, who on several occasions was able to establish propositions and theorems that I could never have proved myself. As I have said on several occasions the work for which I won the prize could not have been done without Sandy and John.
Moving to MIT and Harvard
In 1984 I took a visiting position at the Massachusetts Institute of Technology and this was converted into a permanent position in 1985.
When I arrived MIT had probably the best economics department in the world. It was thrilling, but also quite intimidating, to be a professor there. Greatness was all around. Paul Samuelson still came into the department, Bob Solow was still teaching, and Franco Modigliani was only a couple of floors away. The younger people were very impressive too. Among my colleagues were Peter Diamond, Eric Maskin (who soon left for Harvard), Jean Tirole, and Drew Fudenberg. I spent nearly nine years at MIT, and it was a very productive period for me. Much of my work on financial contracting was done during these years. But, eventually, for various reasons, a change made sense, and in 1992 I was offered and accepted a position at Harvard (not too far away, but a shorter commute from Lexington!). I started there in July 1993.
Anyone reading this far will probably think that I was restless, and there is some truth to this: I did move around a lot. But since arriving in the Harvard economics department, and I have been there now for over twenty-three years, I have never felt a desire to move again. This is home.
Being at Harvard has had many other benefits. I have formed a close relationship with members of the Law School, particularly Lucian Bebchuk, Louis Kaplow, Kathryn Spier, and Stephen Shavell. I co-run a law and economics seminar with several of them. My exposure to these colleagues and to law and economics more generally has improved my understanding of contracts, and contributed immensely to my intellectual life and development. Cambridge is also a large intellectual community and I have continued to have close ties with people from MIT, including Bob Gibbons, Bengt Holmström (who moved to MIT in 1994), Birger Wernerfelt, and Michael Whinston. George Baker was also an active member of this community before he left Harvard Business School for the private sector.
My relationship with Bengt Holmström has been very important. We have written two papers together but more than that we have been close friends for many years and have talked not just about economics, but about our lives, and our hopes and disappointments.
Oliver Hart is the Lewis P. and Linda L. Geyser Professor at. Harvard University, Department of Economics. He has numerous awards and honors: He is a Fellow of the Econometric Society, the American Academy of Arts and Sciences, the British Academy, and the American Finance Association, a member of the National Academy of Sciences, a Distinguished Fellow of the American Economic Association, and has several honorary degrees. He has been president of the American Law and Economics Association and a vice president of the American Economic Association.
• The Prize in Economic Sciences 2016. NobelPrize.org. Nobel Prize Outreach AB 2022
• Oliver Hart – Facts. NobelPrize.org. Nobel Prize Outreach AB 2022
• From The Nobel Prizes 2016. Published on behalf of The Nobel Foundation by Science History Publications/USA, division Watson Publishing International LLC, Sagamore Beach, 2017. This autobiography/biography was written at the time of the award and later published in the book series Les Prix Nobel/ Nobel Lectures/The Nobel Prizes. The Nobel Foundation 2016.. Oliver Hart – Biographical. NobelPrize.org. Nobel Prize Outreach AB 202.
• PAW: An intellectual contract honored
• Time: Four things to know about Hart and Holmstrom