- Person
- Oliver Hart
- Lived
- b. 1948
- Field
- Economics, contract theory
- From
- British-American
The story
Oliver Hart was born in London in 1948 to Jewish parents: his mother was a gynaecologist who had fled Nazi Germany in 1933, and his father an epidemiologist from an old Anglo-Jewish family. From the mid-1980s, working with Sanford Grossman and John Moore, Hart developed the theory of incomplete contracts. Its starting point is that no contract can spell out what should happen in every future situation, so what matters is who has the right to decide when something unforeseen occurs. That right is what ownership gives, and it shapes how hard each party works to improve or protect what it controls.
In the mid-1990s his Harvard colleague Andrei Shleifer suggested applying the idea to a pressing public question: should services that government pays for be delivered by public employees or by private contractors? In “The Proper Scope of Government,” published in 1997 with Shleifer and Robert Vishny, Hart showed that the answer depends on what cannot be written into a contract. A private operator has strong incentives both to improve quality and to reduce costs. But when quality is hard to specify and enforce, the incentive to cut costs can be too strong, because cutting corners saves money even when it harms the people being served.
Prisons were their leading example. A private prison operator can raise its profits by spending less on staff and services, and cuts that harm inmates’ safety and treatment are hard to rule out in advance through a contract. The Royal Swedish Academy of Sciences, in explaining Hart’s contribution, noted that U.S. federal authorities had moved to end the use of private prisons, partly because a Department of Justice report found conditions in privately run prisons worse than in publicly run ones.
The framework does not say privatization is always wrong. Where quality can be measured and written into contracts, private provision may be better. Its value is that it tells governments what to look for: how much of the quality that matters can be pinned down in a contract, and how much a contractor could save by quietly lowering it. Hart has said that since 2016 he has talked about this paper more than any of his other work, because it is an issue the public can relate to.
Why it matters
Hart’s analysis helps governments decide which public services, from prisons to hospitals and schools, to run themselves and which to contract out, and how to write contracts that protect the quality people receive.
About Oliver Hart
London-born Harvard economist whose contract theory explains who should own what and when to outsource, shaping firms, loans and public services like prisons. Nobel Prize 2016.
Sources
- Popular information: The Prize in Economic Sciences 2016 NobelPrize.org
- Oliver Hart, Biographical NobelPrize.org
- Oliver Hart Jewish Virtual Library
- Oliver Hart (economist) Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.