This year’s Nobel Prize in Economic Sciences went to Harvard’s Oliver Hart and MIT’s Bengt Holmström for their pioneering work on the economics of property rights and contracts. At a time when China is attempting the difficult transition to a more market-oriented economy, the value of these contributions could not be clearer.
HONG KONG – This year’s Nobel Prize in Economic Sciences went to Harvard’s Oliver Hart and MIT’s Bengt Holmström for their pioneering work on the economics of property rights and contracts. At a time when China is attempting the difficult transition from a system of incomplete contracts to a strong property-rights regime, the real-world importance of these contributions could not be clearer.
No contract can specify every eventuality. So contracts must, instead, spell out the allocation of “control” rights – who can make decisions in which circumstances. For a centrally planned economy attempting to allocate more authority to the market, such contracts are invaluable – at least at first.
This has not been lost on Chinese reformers. From the mid-1980s to the early 1990s, they introduced both the “rural household responsibility system” and the “enterprise contract responsibility system” for state-owned enterprises (SOEs). Those systems essentially delegated more decision-making rights, as well as certain profits, to farmers and workers, so that they had a stronger incentive to work more efficiently within state-owned communes and firms.
HONG KONG – This year’s Nobel Prize in Economic Sciences went to Harvard’s Oliver Hart and MIT’s Bengt Holmström for their pioneering work on the economics of property rights and contracts. At a time when China is attempting the difficult transition from a system of incomplete contracts to a strong property-rights regime, the real-world importance of these contributions could not be clearer.
No contract can specify every eventuality. So contracts must, instead, spell out the allocation of “control” rights – who can make decisions in which circumstances. For a centrally planned economy attempting to allocate more authority to the market, such contracts are invaluable – at least at first.
This has not been lost on Chinese reformers. From the mid-1980s to the early 1990s, they introduced both the “rural household responsibility system” and the “enterprise contract responsibility system” for state-owned enterprises (SOEs). Those systems essentially delegated more decision-making rights, as well as certain profits, to farmers and workers, so that they had a stronger incentive to work more efficiently within state-owned communes and firms.