To understand their work, start with a pillar of economics that I teach on the first day of class: Incentives matter. Mr. Hart and Mr. Holmstrom take that principle and run with it, seeking to understand incentives within both individual companies and the larger market structure.
Implicit in all of their work is the idea that if it's difficult to design optimal incentives within a single firm, it's well-nigh impossible for central planners to do it for the entire economy. It's telling that much of Mr. Holmstrom's work began when he was a professor at Northwestern's Kellogg Graduate School of Management.
As has become a tradition, I wrote the Wall Street Journal article on the Nobel Prize winners in Economics this year. If I'm counting correctly, I think that makes 16 out of the last 21 years.
I highlight these paragraphs for two reasons: (1) they're my two favorite paragraphs, and (2) the basic idea for the second paragraph was stated by Bob Lawson in a Facebook discussion and, when I used it, Alex Tabarrok gave me a better formulation.
Some things about writing the piece are getting harder and some easier. The main harder one is that they announced at 2:45 a.m. PDT. So I got up then to see who won and started researching. I started writing, as per usual, around 7:00 a.m. and finished at about 9:30 a.m.
The main easier one is the support and help I got from my economist friends. Once I had a version I was reasonably pleased with, I sent it to Lynne Kiesling, Tyler Cowen, and Alex Tabarrok for comments. All had valuable comments. I incorporated Tyler's and Alex's suggestions. The main comment by Lynne was one I totally agreed with but couldn't figure out how to put in within my word limit: the fact that so much of this work on contracting flows from the now-classic 1972 American Economic Review article by Alchian and Demsetz. I still think that Demsetz should win, but am now very pessimistic about whether he ever will. The Nobel Prize in economics has become much more of a prize for technical economics--read, mathematical modeling--in the last 20 years.
Although their ideas did not get implemented in my piece due to time and word constraints, Edward Lopez and Peter G. Klein had excellent suggestions. Indeed, I think Peter Klein's article on the two winners is competitive with mine and possibly better.
I've had a lot of people ask what my time line is. I start researching as soon as I've watched the live presentation from Stockholm. Then I break for early breakfast and go into my downtown office sometime between 5 and 6 a.m. I research until about 7:00 a.m. and then start writing, going back and forth between the writing and the research from 7:00 a.m. to 9:30 or 10:00 a.m. I then send the draft out for comments, get them back within half an hour, tweak the article, send it to my wife, Rena Henderson, who makes her living editing economists, get it back from her within 15 minutes, tweak, and send. I used to promise to send by noon. I now promise to send by 11 a.m. The one upside of the 2:45 a.m. announcement is that makes the promise easier to keep.