Bengt Holmström

2016 Nobel Prize in Economics | Paul A. Samuelson Professor of Economics, MIT
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Bengt Robert Holmström won the 2016 Nobel Prize in Economics (along with fellow Leigh Bureau speaker Oliver Hart) for his work on contract theory. He is that rare economist who has practical experience in the private sector. He is best known for developing concrete answers to practical questions in designing good contracts, especially as regards risks and incentives. He also is an authority on company organization, corporate governance, and corporate finance. Bengt Holmström is the Paul A. Samuelson Professor of Economics at Massachusetts Institute of Technology and holds a joint appointment with MIT’s Sloan School of Management.

Employee incentives and compensation. How do you effectively reward executives for improving company performance? How do you evaluate teachers’ performance without encouraging them to teach to the test? How do you reward teams when a team may have some slackers? Bengt Holmström won the Nobel Prize for his concrete answers to questions like these.

Examples. He was the first to propose tying pay to the broadest possible evaluation of employee performance and to develop principles for mixing base pay with other limited incentives. He was the first to account for multi-tasking in compensation, the fact that employees do lots of different things besides the narrowly defined job description. He identified how, in the 1990s and early 2000s, poorly-designed stock option plans for executives led to bad governance focused on short-term gains. He has identified how high-performance incentives, worker ownership of assets, and worker freedom from direct controls work together to motivate workers.

Risk and incentive in other contexts. Bengt Holmström has also clarified how to optimize contracts in other contexts. In insurance contracts, for instance, what deductible and copay best ensures that people use only the health care they need, yet feel they have been covered properly? How do you design a bureaucracy that provides the right incentives and builds company culture and morale? Should prisons and other public institutions be privatized?

Financial crisis and liquidity. At the height of the Great Recession, Holmström proved the value of governments providing liquidity to private firms unable to raise enough money and identified how lack of transparency in money markets helped cause the crisis.

Credentials. Bengt Robert Holmström is the Paul A. Samuelson Professor of Economics at Massachusetts Institute of Technology. He holds a joint appointment with MIT’s Sloan School of Management. He is an elected fellow of the American Academy of Arts and Sciences, the Econometric Society, and the American Finance Association, and an elected foreign member of the Royal Swedish Academy of Sciences and the Finnish Academy of Sciences and Letters. He is a research associate of the National Bureau of Economic Research in corporate finance. In 2011 he served as President of the Econometric Society.


  • Honorary doctorate degrees from the University of Vaasa, Finland, Stockholm School of Economics, Sweden, and the Hanken School of Economics, Finland
  • Banque de France-TSE Senior Prize in Monetary Economics and Finance in 2012
  • Stephen A. Ross Prize in Financial Economics and the Chicago Mercantile Exchange
  • MSRI Prize for Innovative Quantitative Applications in 2013
  • Distinguished CES Fellow award from CESifo, Munich
  • Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2016

  • Board member, Aalto University in Finland (2010-)
  • Board member, Finnish Business and Policy Forum (EVA) (2005-)
  • Former board member, Nokia Corporation (1999-2012)


Why money markets are different

Money markets are fundamentally different from stock markets. Stock markets are about price discovery for the purpose of allocating risk efficiently. Money markets are about obviating the need for price discovery using over-collateralized debt to reduce the cost of lending. Yet, attempts to reform credit markets in the wake of the recent financial crisis often draw on insights grounded in our understanding of stock markets. This can be very misleading. I will offer a perspective on the logic of credit markets and the structure of debt-contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt. These basic insights into the nature of debt and credit markets are simple, but useful for thinking about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets.

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Beyond Pay for Performance

Incentives are often associated with financial rewards paid based on explicit performance measures. Executive stock options and sales commissions are examples. But pay for performance is just a small part of a properly designed incentive system, which should make use of the array of instruments available to influence individuals and the range of drivers that motivate individuals. Analyzing incentives as a system of interacting instruments and influences has been a major advance in the economics of incentives in recent years. This lecture presents some of the major insights and lessons from this new perspective and what lessons it holds for incentive contracting as well as organizational design.

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Prize Lecture: Laureate in Economic Sciences 2016
Bengt Holmström
Bengt Holmström wins Nobel Prize in Economic Sciences | MIT
Bengt Holmström


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