A Hampstead childhood
Oliver Simon D’Arcy Hart was born in London on October 9, 1948, the only child of two doctors. His mother, Ruth Meyer, was a gynaecologist at a time when women doctors were still uncommon in Britain; she was a German-born Jew who had left Germany in 1933, just after Hitler came to power. His father, Philip D’Arcy Hart, was a distinguished epidemiologist who specialized in tuberculosis and was one of the key figures in the 1948 streptomycin trial, which put the randomized controlled trial on the map of medicine. Philip came, as Oliver puts it, from a long-standing Anglo-Jewish family: he belonged to the Montagu family, and Oliver’s great-grandfather was the banker and philanthropist Samuel Montagu, the first Baron Swaythling.
The family lived in comfortable but by no means luxurious circumstances in Hampstead. A brother born a year earlier had died within hours of birth, so Oliver’s arrival was especially welcome, and his parents were protective of him. His father was 48 when Oliver was born and lived to 106; his mother died at 93. His parents were left-wing and first sent him to a progressive school, then, alarmed by its exam results, to University College School, where he entered just before his ninth birthday after correcting the junior headmaster over a long-division problem. He won a scholarship at 13 and specialized in mathematics, physics and chemistry.
From mathematics to economics
At 17 he went to King’s College, Cambridge, ignoring advice to drop mathematics, and took a mathematics degree in 1969. His contemporaries included Mervyn King, later Governor of the Bank of England, the historian Tony Judt, and his cousin, the chemist Martyn Poliakoff. Hart later regretted that his specialized education never taught him to write, a skill he had to learn painfully as a young researcher, with much help from his wife.
He chose economics partly because, as a young left-winger who liked to argue about politics, he kept losing debates the moment someone mentioned the balance of payments. A master’s course at the University of Warwick gave him a sense of vitality that mathematics had not, and in 1971 he went to Princeton, where Michael Rothschild introduced him to economic theory. He earned his Ph.D. in 1974 with a thesis on general equilibrium with incomplete markets. At Princeton he met Rita Goldberg, a graduate student in comparative literature; they married in 1974.
Cambridge, London, Boston
Hart taught at the University of Essex, then from 1975 at Cambridge, where he was a fellow of Churchill College and part of a lively group of theorists gathered by Frank Hahn. In 1976, at a Stanford summer workshop, he began working with Sanford Grossman, a younger economist he called one of the most brilliant people he had ever met; their partnership lasted about twelve years. In 1982 he became a professor at the London School of Economics, where he met John Moore, beginning a second collaboration that ran for some twenty-five years.
In 1984, with British universities squeezed by cuts and few openings in his wife’s field, the couple moved to the United States. Hart joined the Massachusetts Institute of Technology and, in 1993, Harvard, where he became the first Andrew E. Furer Professor of Economics, chaired the economics department from 2000 to 2003, and is now the Lewis P. and Linda L. Geyser University Professor. He holds both British and American citizenship.
The problem of incomplete contracts
Contracts are everywhere: employment contracts, loans, insurance, supply agreements. Earlier theory had assumed that a contract could, in principle, spell out what each party should do in every possible future situation. Hart’s great insight, developed with Grossman and Moore from the mid-1980s, was that real contracts are always incomplete. No one can foresee or write down every contingency, and many things that matter, such as the quality of a new product or the effort put into an idea, cannot be verified by a court.
If a contract cannot say what should happen, Hart argued, it must instead say who has the right to decide when the parties disagree. Those residual rights of control are what ownership means. The party that owns an asset has more bargaining power when something unforeseen happens, and therefore stronger reasons to invest in it. In complex situations, allocating decision rights becomes an alternative to paying for performance. This simple idea gave economists, for the first time, a rigorous theory of why firms exist where they do, which assets they should own, and when it is better to buy from an outside supplier.
Owning versus outsourcing
In their 1986 paper “The Costs and Benefits of Ownership,” Grossman and Hart showed that ownership should go to the party whose investments matter most and are hardest to write into a contract. The Royal Swedish Academy of Sciences gave an example: if a new invention needs a machine and a distribution channel, and innovation is the activity hardest to contract on, it may be best for the inventor to own all the assets, even without production or sales expertise. With Moore, in 1990, Hart extended the theory to firms with many assets and many people, and their work became the foundation of what economists call the property-rights theory of the firm.
The theory also explains how lending works. If investors cannot write a contract based on a company’s true profits, a good solution is to promise them a fixed repayment backed by collateral, with control passing to them if the payment is missed. That is how most bank loans work. More generally, Hart’s theory predicts that entrepreneurs should control their firms while things go well, and investors should gain more control when performance deteriorates, which is exactly how venture capital contracts and bankruptcy rules are typically structured.
Prisons, hospitals and the limits of privatization
In the mid-1990s his Harvard colleague Andrei Shleifer suggested applying incomplete-contract ideas to a public question: should services paid for by government be provided by private contractors or by public employees? Their 1997 paper with Robert Vishny, “The Proper Scope of Government,” argued that private operators have strong incentives to cut costs, but those incentives can be too strong when quality is hard to specify in a contract, because cutting corners saves money. Whether privatization makes sense therefore depends on the balance between cost savings and the risk to quality.
Their leading example was prisons, where cost-cutting can mean poorer conditions and less safety for inmates and staff. The Nobel committee placed much weight on this paper, and Hart has said that since the prize he has talked about it more than any of his other work, because it is an issue the public can relate to. The committee noted that a 2016 U.S. Department of Justice report had found conditions worse in privately run prisons than in public ones. The same framework is used to think about schools, hospitals and other public services, helping governments decide what to contract out and how to write contracts that protect quality.
Law and the courtroom
Hart’s ideas reach into law. At Harvard he has worked closely with law professors such as Lucian Bebchuk, Louis Kaplow, Kathryn Spier and Steven Shavell, co-running a law and economics seminar, and he has served as president of the American Law and Economics Association. He has also used his theory as an expert witness for the U.S. government in two tax cases, Black and Decker v. United States and WFC Holdings (Wells Fargo) v. United States, in which companies claimed tax benefits from selling parts of their business. Drawing on Hart’s research on ownership as control, the government argued that because the companies had kept control of the assets, they were not entitled to the benefits.
In recent years he has worked with Luigi Zingales on what companies owe their shareholders, asking whether companies should serve their shareholders’ wider values and welfare rather than market value alone, a line of research he has said he hopes to continue.
Jewish family and private life
Both of Hart’s parents were Jewish. His mother was a refugee from Nazi Germany; his father’s family was part of the old Anglo-Jewish establishment, descended from the banker Samuel Montagu, first Baron Swaythling. His wife, Rita Goldberg, is a Harvard literature professor and the author of Motherland: Growing Up with the Holocaust, a memoir of her mother, Hilde, whose German-Jewish family had moved to Amsterdam as the Nazis gained power. Hilde, a friend of the Frank family, joined the resistance and survived the war; she met Rita’s father at Bergen-Belsen after liberation, and Otto Frank became Rita’s godfather. Hart has not written publicly about religious practice.
The couple have lived in Lexington, Massachusetts, since 1985. They have two sons, Daniel and Benjamin, and grandchildren, and the family spends summers together on Martha’s Vineyard. Hart swims regularly and returned to the piano in middle age, with the modest hope that more practice might lift him above the mediocre. He has written warmly of his debts to collaborators and friends, including Grossman, Moore, Shleifer, Philippe Aghion and Bengt Holmström, with whom he shared the 2016 Nobel Memorial Prize in Economic Sciences for contributions to contract theory.
Legacy
Contract theory, in the words of the Nobel committee, has influenced fields ranging from corporate governance to constitutional law. Hart’s part of it changed the basic questions economists ask about organizations. Instead of treating firms as black boxes, his theory asks who holds control when the unexpected happens, and why that matters for investment, innovation and fairness. Those questions now guide decisions about mergers and outsourcing, the design of loans and venture capital deals, bankruptcy law, and whether governments should run prisons, hospitals and schools themselves or hire private firms to do it.
Sources & further reading
Oliver Hart, Biographical, NobelPrize.org · Popular information: The Prize in Economic Sciences 2016, NobelPrize.org · Press release: The Prize in Economic Sciences 2016, NobelPrize.org · Oliver Hart, Jewish Virtual Library · Motherland: Growing Up with the Holocaust, Jewish Book Council · Oliver Hart (economist), Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
A life 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.