The work in microeconomic theory for which Oliver Hart and Bengt Holmström have received this years Nobel Prize goes back to the 1970s and 1980s when the foundations of contract theory were being firmed up.
Their work has provided economists the tools to understand interactions between entities in a range of fields, such as the design of performance incentives in firms and schools, corporate governance, privatisation, constitutional law, and entrepreneur-investor relationships.
The Royal Swedish Academy of Sciences highlighted that their contributions to understanding “real-life contracts and institutions, as well as the pitfalls when designing new contracts” were crucial.
Mr. Holmström, in 1979, published a theoretical model and result that significantly enhanced the understanding of risk and incentives in employer-employee relationships.
This was called the informativeness principle, which said performance should be linked to all variables or outcomes that provide information on the actions taken by an agent, such as a firm’s manager, and not just the outcomes she can effect.
Remunerating a manager based on just the share price of her firm will reward and punish her for factors beyond her control, and a better contract would therefore link managerial compensation to the firm’s share price relative to the share prices of other comparable firms.
Mr. Hart’s key contribution to contract theory has been the notion of incomplete contracts. Not all information is available ex ante; how does a contract allow principals (such as employers) and agents (such as employees) to negotiate unforeseen situations?
The work by Mr. Hart and his colleagues in this area was cited by the Academy for its breakthrough nature.
The Economics Nobel raises larger questions given the high-profile nature of the subject and the fact that it is the only social science for which a prize is awarded. Analysis from The Economist and the Nobel organisation shows that of the 77 laureates who shared the 48 economics prizes awarded between 1969 and 2016, all of 38 were U.S. residents and 10 were British.
Economic historians Avner Offer and Gabriel Söderberg recently pointed out that while the prize may not have a significant liberal or conservative bias, only one person has been awarded a prize for ‘social democracy’ — how governments provide for their people — as opposed to ‘hard economics’ despite social democratic principles governing how 30 per cent of GDP is allocated in developed countries.
Why this has happened is perhaps less important than pointing out that it has happened, so there is an awareness of what the economics prize is, and what it is not.
Contract Theory:-
Contract theory is not merely the study of legally binding contracts. Broadly defined, it studies the design of formal and informal agreements that motivate people with conflicting interests to take mutually beneficial actions. Contract theory guides us in structuring arrangements between employers and employees, shareholders and chief executives, and companies and their suppliers.
In essence, contract theory is about giving each party the right incentives or motivations to work effectively together.
Previously, general equilibrium theory had already shown how efficient outcomes can be achieved under ideal circumstances, through detailed contractual agreements. In fact, research in this area has already led to a number of other economic science prizes.
However, this research ignored two potential issues: informational problems and incomplete contracts. By studying these two issues, Hart and Holmström developed what has become modern contract theory.
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[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]2021 WEF Global Gender Gap report, which confirmed its 2016 finding of a decline in worldwide progress towards gender parity.
Over 2.8 billion women are legally restricted from having the same choice of jobs as men. As many as 104 countries still have laws preventing women from working in specific jobs, 59 countries have no laws on sexual harassment in the workplace, and it is astonishing that a handful of countries still allow husbands to legally stop their wives from working.
Globally, women’s participation in the labour force is estimated at 63% (as against 94% of men who participate), but India’s is at a dismal 25% or so currently. Most women are in informal and vulnerable employment—domestic help, agriculture, etc—and are always paid less than men.
Recent reports from Assam suggest that women workers in plantations are paid much less than men and never promoted to supervisory roles. The gender wage gap is about 24% globally, and women have lost far more jobs than men during lockdowns.
The problem of gender disparity is compounded by hurdles put up by governments, society and businesses: unequal access to social security schemes, banking services, education, digital services and so on, even as a glass ceiling has kept leadership roles out of women’s reach.
Yes, many governments and businesses had been working on parity before the pandemic struck. But the global gender gap, defined by differences reflected in the social, political, intellectual, cultural and economic attainments or attitudes of men and women, will not narrow in the near future without all major stakeholders working together on a clear agenda—that of economic growth by inclusion.
The WEF report estimates 135 years to close the gap at our current rate of progress based on four pillars: educational attainment, health, economic participation and political empowerment.
India has slipped from rank 112 to 140 in a single year, confirming how hard women were hit by the pandemic. Pakistan and Afghanistan are the only two Asian countries that fared worse.
Here are a few things we must do:
One, frame policies for equal-opportunity employment. Use technology and artificial intelligence to eliminate biases of gender, caste, etc, and select candidates at all levels on merit. Numerous surveys indicate that women in general have a better chance of landing jobs if their gender is not known to recruiters.
Two, foster a culture of gender sensitivity. Take a review of current policies and move from gender-neutral to gender-sensitive. Encourage and insist on diversity and inclusion at all levels, and promote more women internally to leadership roles. Demolish silos to let women grab potential opportunities in hitherto male-dominant roles. Work-from-home has taught us how efficiently women can manage flex-timings and productivity.
Three, deploy corporate social responsibility (CSR) funds for the education and skilling of women and girls at the bottom of the pyramid. CSR allocations to toilet building, the PM-Cares fund and firms’ own trusts could be re-channelled for this.
Four, get more women into research and development (R&D) roles. A study of over 4,000 companies found that more women in R&D jobs resulted in radical innovation. It appears women score far higher than men in championing change. If you seek growth from affordable products and services for low-income groups, women often have the best ideas.
Five, break barriers to allow progress. Cultural and structural issues must be fixed. Unconscious biases and discrimination are rampant even in highly-esteemed organizations. Establish fair and transparent human resource policies.
Six, get involved in local communities to engage them. As Michael Porter said, it is not possible for businesses to sustain long-term shareholder value without ensuring the welfare of the communities they exist in. It is in the best interest of enterprises to engage with local communities to understand and work towards lowering cultural and other barriers in society. It will also help connect with potential customers, employees and special interest groups driving the gender-equity agenda and achieve better diversity.