On Monday, the Swedish Academy named the two winners of this year’s Nobel Prize in economics. They are economists Oliver Hart and Bengt Holmstrom from the Massachusetts Institute of Technology. They are awarded for their contributions in contract theory. The academy said their work was “invaluable in helping us understand real-life contracts and institutions, as well as the potential pitfalls when designing new contracts.” The academy’s press release reads that the modern economy is built on a combination of a large number of different contracts, for example those between shareholders and top executive management, an insurance company and car owners. These contractual relationships typically result in conflicts of interest. So the research work on the contracts theory is crucial - contracts must be properly designed to ensure that the parties take mutually beneficial decisions. The research of Hart and Holmstrom shed light on these complex processes and enhanced understanding of the functioning of such contractual relationships as performance-based pay for top executives, deductibles and co-pays in insurance, and even the privatization of public-sector activities. The Nobel Prize in Economics was established in 1969 by the Swedish central bank, Sveriges Riksbank. The prize is financed by the regulator and its current amount is set at 8 million Swedish kronor.