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ECONOMY
THE NOBEL PRIZE IN ECONOMIC SCIENCES 2016:
DESIGN OF ECONOMIC CONTRACTS
– CREATION OF INCENTIVES FOR
EFFICIENT USE OF RESOURCES
AND COPING WITH CONFLICTS OF
INTEREST
Vladimir Filipovski
University “Ss. Cyril and Methodius”
Faculty of Economics in Skopje
1 Hart, O., (1989), “Incomplete contracts” valuable for something else which is
in The New Palgrave: A Dictionary of
Economics, Macmillan Press Limited, UK.
22 November 2016
The economic relations be-
tween people are basically
relations of exchange of
valuable items – or quid pro Sciences for “their contributions to con-
quo, exchange of something
also valuable. According to one of the
winners of the Nobel Prize in Econom-
ic Sciences for 2016, professor Oliver
Hart, “any exchange – as quid pro quo
– must be mediated through some form
of a contract, regardless of whether it is
explicit or implicit” . Management con-
tracts, insurance contracts, loan con-
tracts, employment contracts – all of
them formally-legally define the rules
and the obligations of the two parties in
the economic transactions. However, in
their economic essence, these contracts
allocate the rights of decision-making
about the manner of use of the econom-
ic resources and they determine the mo-
tivation and the incentives for rational
and efficient behavior of the economic
actors in the use of resources.
The Nobel Prize in Economic Sciences
for 2016 is shared by two eminent econ-
omists from two supreme American
universities: Bengt Holmstrom from
the Massachusetts Institute of Technol-
ogy and Oliver Hart from Harvard Uni-
versity. In the official announcement of
the Nobel Committee it is indicated that
they get the Nobel Prize in Economic
tract theory”.
In insurance contracts, if there is full
insurance against damage, this creates
inadequate incentives for the insured in
a form of a so called moral hazard. Mor-
al hazard means that any person who
would get full coverage of the damage
from the insured event should insuffi-
ciently care to prevent the emergence
of the risky event. In employment con-
tracts, when the manner of salary deter-
mination is defined, one should have in
mind these general aspects of the insur-
ance contracts. For example, in manage-
ment contracts, when the managerial
salary is fixed, it is a form of insurance
of the manager against fluctuations of
the company performances. However,
this creates a moral hazard in terms of
insufficient motivation of the manager
to more productively work in the inter-
est of the (owners) of the company. For
this reason, the income of the manager
is partially related to the performances
of the company (pay for performance).
This variable part of the income is the
way how the manager undertakes a part