All economics is about 'incentives' - 2016 Economics Nobel Prize Winner Bengt Holmstrom

1. "All of economics is about incentives. This is about incentive contracting. This is about trying to motivate people to do things that are mutually beneficial," Holmstrom said.

2. "Contract theory considers, for example, whether managers should get paid bonuses or stock options, or whether teachers or healthcare workers should be paid fixed rates or by performance-based criteria."

3. "Note that it’s not just about the private sector. We really are trying to work out that perfect mixture of carrots and sticks to beat the principal agent problem. Which is that when we hire someone to do something for us, fix us, run our business, teach our children, their interests are not aligned with our own. They want to do the least amount of fixing, teaching or running, for the maximum amount of money. We’d rather like the opposite, the maximum output with the minimum cost or input. So, how do we construct our employment contract in order to align interests?"

4. "Mistakes have been made in the design of executive compensation. The biggest design flaw is that they didn't force the executives to hold onto to their incentives for longer" said Homstrom.

5. "So, how should we construct incentives in order to gain the goal that we actually desire from whatever activity it is that is happening? And no, the answer just isn’t “more money.”"

6. "There are two central ideas in economics:
One - Incentives matter
Two - There is always an opportunity cost (there is no such thing as a free lunch).

And if you get those two ideas you will indeed have the core structure of economics at your fingertips. Opportunity costs means that there are always costs to doing something. Those costs being, at the very minimum, the lost opportunity to be doing all of the other things that you could have done instead. There simply isn’t anything at all that is without cost. It may well be that the benefits are greater than those costs, but nothing at all is without costs."

7. "And the first one, incentives matter, is the part that the Nobel was awarded for today. Not the observation of course, but the detailed examination of how this actually works out in life. Something we’d like to know as we’d like to know how to construct the incentives that get us to where we want to go".


Sources:

http://www.cnbc.com/2016/10/10/oliver-hart-bengt-holmstrom-win-nobel-prize-in-economics.html

http://www.forbes.com/sites/timworstall/2016/10/10/economics-nobel-for-exploring-the-central-contention-of-economics-incentives-matter/#1894c7c177da