Yesterday, the 2016 Nobel Prize in Economics was awarded to two economists for their contributions in the field of “Contract Theory”. Oliver Hart and Bengt Holmstrom are being recognized for creating frameworks to write contracts – improving both the design of contracts and shedding light on how contracts help us deal with conflicting interests.
“Contracts are essential to the functioning of modern societies,” the Royal Swedish Academy of Sciences, which awarded the prize, said. “Economies are held together by innumerable contracts. Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.”
Dr. Hart’s research focused on commercial contracts and the extent to which they are incomplete instruction manuals that cannot specify what to do in every case, so instead must stipulate how decisions should be made. Dr. Holmstrom’s work has focused on employment contracts and he is the pioneer behind performance-based pay, tying employee compensation to work productivity.
Rapid Change and Opportunity in the Field of Contract Management
The award comes at a time of rapid change and opportunity in the field of contract management. Today’s enterprise is going through a massive technological change. Every business process in the next 5-7 years is going to be re-looked at given the new models of doing business and contract management is no different. The CXO suite wants total control of their assets with the same governance, risk and compliance throughout the company. Contracting has evolved into an enterprise-wide business process.
Hart and Holmstrom are truly pioneers in the field and they have given us new ways to think about how contracts should be designed. In addition, the recognition of their work by the Nobel prize committee underscores the importance contracts play in modern society and how much opportunity there is to create and manage contracts more effectively. It begs the question, what are you doing to manage your contracts?
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