Oliver Hart and Bengt Holmström
Citation: For their contributions to contract theory.
The key idea
Holmström: optimal incentive contracts under moral hazard — the trade-off between risk and incentives. Hart: incomplete contracts — when contracts can't specify everything, residual control rights matter.
The explanation
Holmström's 1979 paper formalised the principal-agent problem under hidden action. Hart's incomplete-contracts theory (with Moore, 1990) explained why some economic interactions occur within firms (where one party has residual control) rather than through markets (where contracts must specify all contingencies).
Why Africa should care
Contract theory is the analytical core of African Public-Private Partnerships (PPPs): which contingencies can be specified, who gets residual rights, how performance is monitored. The Kenyan Lake Turkana Wind Power PPP, the Lagos toll road concessions, and various PPP failures all illustrate Hart-Holmström dynamics. Employment-contract design (especially for executives and salespeople) directly applies Holmström's optimal-contracting framework.
How to use it
When designing any agency relationship (employee, consultant, supplier, PPP), specify: what is observable, what is verifiable, what is non-contractible. The last category determines who needs residual control rights.
Canonical works
- Bengt R. Holmström (1979) "Moral Hazard and Observability" Bell Journal of Economics
- Oliver Hart and John Moore (1990) "Property Rights and the Nature of the Firm" Journal of Political Economy
- Oliver Hart (1995) "Firms, Contracts, and Financial Structure" Oxford University Press
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