By Suzanne Besser
Bengt Holmstrom has become a worldwide celebrity. Thousands of emails flow into his Inbox, waiting his reply. Frenzied media in countless countries captured the news. Even his 91-year old mom, happily ensconced in a Finish retirement community, granted some lucky reporters a private interview.
Holmstrom just won the Nobel Memorial Prize in Economic Science. Those who know him are not surprised. An uncommonly modest man, his distinguished career and significant contributions to economic theory were already known around the world by his friends and colleagues, who predicted that someday he would be recognized by the Academy. Yet despite his recent fame and fortune, his Mt. Vernon condominium neighbors are still counting on him to help drop candy in buckets on Halloween night…and he’ll be there, just as he always has.
If you live along West Cedar Street, you’ve most likely seen Holmstrom, a tall, white haired gentleman who greets with a warm smile those he passes on his daily walk to MIT. There he has served as the Paul A. Samuelson Professor of Economics and a faculty member in the MIT Sloan School of Management since 1994. He and his wife Anneli moved to Beacon Hill five years ago. They have a grown son Sam.
Holmstrom and a colleague Oliver Hart of Harvard shared the award for their contributions to contract theory – a comprehensive framework for analyzing many diverse issues in contractual design like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatization of public sector activities, according to the Royal Swedish Academy of Science.
“Contract theory is really about incentives made in a formal contract or an informal agreement,” Holmstrom explained. “How do we get an employee or a CEO or anyone in our life to do what we want them to do?”
In a NPR interview Holmstrom called some incentives in economic life ‘creepy and manipulative’ and produce unintended results. He cited the Wells Fargo scandal as an example.
“They thought they were designing a good scheme, perhaps, initially,” said Holmstrom. “If you raise the number of new accounts you are getting, that’s your business model. You get rewarded. And they probably created new genuine accounts initially. But then, they ran out of genuine accounts. People were being paid more for opening new accounts, so they made up accounts.”
His MIT colleagues praise the Academy’s decision, calling Holmstrom’s work ‘pathbreaking’ and the award fitting because it was won previously by Paul A. Samuelson, also an MIT professor of economics whose professorship Holmstrom now holds.
Born in Helsinki, Holmstrom, who had had no economics training, worked for a multinational conglomerate in Finland from 1972 to 1974 and was sent to Stanford University on a one-year fellowship to work on computer programs to improve company productivity. “I was supposed to go and do models,” he told NPR. “These were early days in computing. People thought computers can replace a lot of what the human mind is thinking. And I quickly realized that that was not the case. So that’s how I got interested in incentives.”
And it so happened that incentives were also beginning to be of interest to economists so Holmstrom decided to stay at Stanford to earn his doctorate. His thesis, which he wrote in longhand in 1977, was titled ‘On Incentives and Controls in Organizations, Part 1.’ With characteristic dry humor, Holmstrom admitted to almost losing the thesis. He had made one copy of the handwritten dissertation which he gave to a typist at Stanford. He left the other in his car. Alas, the car was stolen. Did the thieves recognize that the paper was Nobel prize-worthy?
“I am sure they did not,” Holmstrom said. “I eventually got the car back and one of the things they left behind was the dissertation.” It went on to became part of the body of work that led to his winning the Nobel Prize.
Holmstrom told the MIT News that he is looking forward to getting back to his research. “I don’t have any intention to use this as a platform for throwing myself into a public debate,” he said. “There are various styles of reacting to [winning] the Nobel Prize. Some people become experts on everything when they get the prize, and others continue to be themselves, so to speak. I think I will be more of the latter.”