Work on contract theory - with implications for firms, constitutional law and politics - earned US-based economists Oliver Hart and Bengt Holmstrom the 2016 Nobel Prize in Economic Sciences, the Royal Swedish Academy of Sciences announced Monday.

British-born Hart has worked in the United States since the 1980s, and is currently a professor at Harvard University.Holmstrom, a Finn, is a professor at the Massachusetts Institute of Technology (MIT), also in the United States.Contracts affect "all of us in society," said Per Stromberg, the chairman of the Nobel Sciences Prize Committee, citing insurance, employment and sales contracts as examples.The theories that Hart and Holmstrom developed are "incredibly important" for people to understand these kinds of contracts and institutions, Stromberg explained at a press conference.

"Thanks to their research we can analyze not just financial terms, who should get paid what, but also control and decision rights, ownership, property rights and other types of decision rights," he added.

The theories of Hart and Holmstrom also help identify "potential pitfalls in contract design," the academy said in a statement.

Holmstrom said he was delighted at winning the award. "I was dazed, like most prize winners, very surprised and very happy," he said, speaking by telephone to reporters at the Royal Swedish Academy of Sciences. Holmstrom's work has demonstrated how the best contracts weigh risks against incentives, the academy said. He then applied that theory to more realistic settings, including job promotion or "free-riding" in the workplace.

He said he as a researcher had felt "it was key to be part of business," when asked about his past experience as board member of Finnish telecommunications group Nokia from 1999 to 2012.

Holmstrom told reporters he had "not thought" about what to do with his half of the prize, saying, "It's the last thing I have considered."

Tessa Bold, academy member and professor of economics at Stockholm University, told dpa the two laureates have "really formalized our understanding of the contracts around us, and contributed methods and analysis how to understand contracts and how to design them."

She added that "contracts in an economic sense are really any type of agreement we can make."

Hart said he hugged his wife on learning of his win.

"I woke at about 4:40 and was wondering whether it was getting too late for it to be this year, but then fortunately the phone rang," Hart said on Twitter. "My first action was to hug my wife, wake up my younger son ... and I actually spoke to my fellow Laureate [Bengt Holmstrom]," he added. Hart's research has focused on dealing with events that are not specified in contracts, or so-called "incomplete contracts." "Hart's findings on incomplete contracts have shed new light on the ownership and control of businesses and have had a vast impact on several fields of economics, as well as political science and law," the academy said.

Bond said Hart's work has shown that although many aspects in life are observable, "we still can't write contracts on them. So in life, many contracts are incomplete." With the exception of economics, the prizes were endowed by Swedish industrialist Alfred Nobel (1833-96), the inventor of dynamite. The economics prize, which was not one of the original prizes mentioned in Nobel's will, is formally called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It was set up and funded by the Swedish central bank and first awarded in 1969. It is worth 8 million kronor (930,000 dollars), the same as the other Nobel prizes. Last year, Scottish-American economist Angus Deaton received the reward for his work exploring the interrelationship of consumption, poverty and welfare.

The Nobel Prizes for medicine, physics, chemistry and peace were announced last week. The last prize to be announced this year is for literature, which is due on Thursday.

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