"Nobel Prize in Economics" awarded for contract theory

[Guest PepeTheFrog]

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2016/popular-economicsciences2016.pdf

The fake Nobel Prize in Economics* was awarded to Oliver Hart and Bengt Holmstrom for their contributions to "contract theory."

*There is no such thing as a Nobel Prize in Economics. Sweden's central bank created this prize in the late 1960s supposedly in memory of Alfred Nobel. Each year, the Royal Swedish Academy of Sciences awards the "Sveriges Riksbanks Prize in Economic Sciences in Memory of Alfred Nobel."

[Guest Vern Edwards]

Pepe:

I'm disappointed by your post making fun of the Nobel Prize in economics. Is that the only thing you got out of the announcement?

I'm not familiar with Holmstrom's work, but Hart's work is very important to government contracting professionals, because government contracts for long-term complex services are unavoidably incomplete. Hart's work shows why the CICA requirement for price competition and PBSA are bad policies. The following is from Hart's 1999 paper, "Foundations of Incomplete Contracts":

Quote

Many papers in the incomplete contracts literature motivate the idea of contractual incompleteness as follows. Imagine a buyer, B, who requires a good (or service) from a seller, S. Suppose that the exact nature of the good is uncertain, more precisely, it depends on  a state of nature which is yet to be realized. In an ideal world, the parties would write a contingent contract specifying exactly which good is to be delivered in each state. However, if the number of states is very large, such a contact would be prohibitively expensive. So instead the parties will write an incomplete contract. Then, when the state of nature is realized, they will renegotiate the contract, since at this stage they know what kind of good should be traded.

That perfectly describes the situation in government contracts for long-term complex services. If our OFPP and contracting policy staffs had been more literate in the early 1990s, they never would have come up with, much less pushed, PBSA, and they would have gone to Congress to seek permission to use qualifications-based source selection and drop the requirement for price competition in all cases. Instead, they would have come up with something more like this:

http://www.dau.mil/pubscats/pubscats/arj45/ARJ45_Edwards.pdf

Unless you know the work of people like Hart, Ian R. Macneil, and others who have written about incomplete and relational contracting, you shouldn't waste time making fun. Instead, you should go spend some time in a good library.

Ignorance is not amusing.

[jonmjohnson]

I agree with Vern on this.  Here is their piece in case you are interested in reading it:  http://dspace.mit.edu/bitstream/handle/1721.1/64265/theoryofcontract00hart.pdf?sequence=1

Agency theory, labor theory, incomplete contracts and "lock-in" affect, information asymmetry, bounded rationality.  It is worth the read.  Their premise is essentially that historically the study of contracts has been on complete contracts where everything is able to be accounted for.  This is a traditional view of economists.  However when dealing with complex contracting this is rarely the case, and progress is not likely when incompleteness meets preconceived assumptions.  I think their work is clearly applicable to the federal space moreso than any other contractual environment.

[Guest PepeTheFrog]

Drawing attention to the work-- because it's relevant to Government contracting-- is not making fun of it. Explaining the background of an often-misunderstood prize is far from amusement. PepeTheFrog pointed out that the "Nobel Prize in Economics" is an add-on created by the central bank of Sweden, which is something the reader might not discover by reading the awardees' work. That's a distinction PepeTheFrog finds interesting, but apparently gets you all hopped up. Others also find it interesting, if not controversial:

https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences

Here's an economics lesson: insults and barbs are like praise and compliments...if you flood the market, the value declines.

[Guest Vern Edwards]

Pepe:

Two people do great work, and instead of congratulating them and discussing the work they produced we refer to their prize as "fake" and put contract theory in ironic quotes. That, to me, is a putdown. I would have rather you'd had something to say about the work and its relevance to us. I've always enjoyed your posts and I expect to enjoy them again, but not this time. If you didn't mean it as a putdown, I wish you'd been clearer. If you did, I wish you'd thought about it first. As for economics lessons, try reading their work.

All:

The papers written by Hart and Holmstrom are written in academic language and use symbols to present economic models and proofs. That sort of stuff can be off-putting if you're not used to it. If you would like to learn about incomplete contract theory without working through a lot of symbols and dense proofs, try reading "Incomplete Contracts and the Theory of Contract Design," by Scott and Tirantis. You can find it here:

http://scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=1634&context=caselrev

The authors rely mainly on nontechnical language and do not use symbols. It's pretty accessible.

Another good read is "Long Term Contracts and Relational Contracts," by Hviid. It includes an extensive bibliography. You can find it here:

http://encyclo.findlaw.com/4200book.pdf

[here_2_help]

Hey Vern,

How was Paris? Will we get a blog article about your experience?

[Guest Vern Edwards]

Hi Help:

Paris is our second home. Everything was as it should be (but isn't always). I'm putting together an email with photos for friends, and I'll include you on the mailing list.

No blog entry, though.

Vern

[here_2_help]

Looking forward to it! I've never been but we're thinking about a future London trip with a couple of days dedicated to Paris

[Guest Vern Edwards]

I suggest a trip to Paris with a couple of days in London, unless you have friends of family in London. Most Parisians you'll meet will speak at least some English, and despite what you may have heard, they are very polite, except, perhaps, in August. No one in Paris is polite in August.