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The Academy also cites a pair of insights about contract structures that Holmström developed in the early 1980s.

In the 1982 paper “Moral Hazard in Teams,” he concluded that dividing a firm’s income among its workers could lead to a free-rider problem, in which some employees contribute less than others, relative to their compensation.

This principle suggests that optimal contracts should structure compensation based on “all outcomes that can potentially provide information about actions that have been taken,” as the Academy observes.Bengt Holmström, an influential MIT economist and long-time faculty member, has been named a winner of the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, for his work on contract theory.Holmström was named co-winner of the prize along with Oliver Hart of Harvard University.As Holmström noted in the paper, current salaries do not necessarily neatly match employee performance; instead, firms may reward current performance with higher salaries to prevent employees from switching firms in a competitive labor market.However, these dynamics may not apply as effectively to later-career employees.One of the ways we usually think about markets is in terms of the market for, say, crude oil or Apple stock.

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