Nobel Economics Prize for 2016

For this year, 2016 Britain’s Oliver Hart and Finland's Bengt Holmstrom won the Nobel Economics Prize for work that addresses a host of questions from how best to reward executives to whether schools and prisons should be privately owned

The penalties and fines imposed by the regulators on the banks for transacting specially breaching the anti sanction countries or persons is like pages of a horror book stories. It is really mind boggling to go through the numbers which some of these global banks had to pay as penalties. BNP Paribas paid almost $8.9 billion in penalties and pled guilty to settle charges it concealed roughly $8.8 billion of transactions with countries like Sudan, Iran and Cuba. The French government has protested the penalty, saying it was too high, and President Francois Hollande raised the issue personally with President Obama in early June. But in the end, the Justice Department said BNP Paribas did not appropriately cooperate with U.S. authorities, necessitating a high fine.
The previous record-holder for largest sanctions fine was HSBC, which in December 2012 paid nearly $1.3 billion as part of a deferred prosecution agreement (The bank also had to pay an additional $665 million in civil penalties). HSBC was accused of conducting transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma, all of which were on the sanctions list. Federal authorities also said HSBC allegedly helped to launder around $881 million in drug proceeds through the U.S. financial system. Standard Chartered Bank was fined USD 227 million to transfer wire transfer from clients in Iran, Sudan, Libya and Burma. These are couple of examples of hefty penalties by the global behemoth of banking industry. The story of collapse of Baring Brothers due to the trading activities of Nick Leeson is a classic story of corporate greed.
'The Pay for Performance' is  a favourite management buzz word. The variable portion of the annual compensation like stocks, options and other fringe benefits made the corporate high flyers to tick and drive the corporates with motive of profit maximisation. Though profit is the ultimate driver for any corporates but the contracts for the top brasses are made in the form that  the risk of breach of corporate governance and flaunting of rules and regulations where a major area of entire operations remain unexposed. The penalties and fines imposed on the top banks or other corporates have become very common in the global environment
The Nobel Memorial Prize for Economic Science (Swedish National Bank's Prize in Economic Science in memory of Alfred Nobel) commonly referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics, and generally regarded as the most prestigious award for that field. The prize was established in 1968 by a donation from Sweden's central bank, the Sveriges Riksbank on the bank's 300th anniversary. Although it is not one of the prizes that Alfred Nobel established in his will in 1895, it is referred to along with the other Nobel Prize by the Nobel Foundation. Winners are announced with the other Nobel Prize winners, and receive the award at the same ceremony.
It became especially relevant in the years since the 2008 financial crisis, which was blamed on the short-term risk encouraged by huge cash bonuses paid to investment bankers. It also touches on themes of moral hazard, which arises where those that take the risks don't share in the costs of failure. In a summary, the Contract Theory may be briefed in the following: 1. Contract theory has its roots in the 1700s. Adam Smith argued that crop sharing contract may not necessarily motivate the tenants to improve on the quality of the land. The theory was later revisited in the 1930s when American business executive Chester Barnard considered how to get employees to put more effort into their work in big companies. Barnard is considered the pioneering author related to management theory and organisational studies. 2. The theory looks at the difficulty of tying pay to performance. A company might pay a CEO based on an increase in stock-market value, but this could end up being just luck. In the late 1970s and early '80s, work by Holmström on the "Informativeness Principle" helped develop models of performance that counterbalanced external factors beyond the control of managers. 3. Contract theory also looks at short-term incentives and the problem that managers might prioritise quick gains over future stability. In the 1990s Holmström developed the "Multitasking Model," which provided a way of measuring this effect. 4. The model has been expanded to capture the moral hazard of teamwork, to understand that some of the employees piggyback on the performance of others while some of the employees are always focused on the future career progression. In these cases, some of the employees may be motivated to assume more risks while others remain risk averse.  5. Oliver Hart's work focuses on the idea of "incomplete contracts" and their relationship to property rights. 6. The theory goes that almost all contracts are incomplete because performance can not be measured perfectly. Even if you could measure it accurately, it would be too complex to reflect in a contract as the contracts do not only include quantitative but intangibles with in it. 7. The interests of various stakeholders including shareholders, managers and regulators have been tested under the stressed situation like bankruptcy to hold the theory. 8. The work is important and has far-reaching applications. Here is what the Academy said: "It generates precise hypotheses that can be confronted with empirical data and lays an intellectual foundation for the design of various policies and institutions, from bankruptcy legislation to political constitutions."
As the Nobel committee explained, “In industries with high risk, payment should thus be relatively more biased towards a fixed salary” — to offer employees stability — “while in more stable environments it should be more biased towards a performance measure” — to give employees incentive to work harder and not become complacent. This balance between risk and incentives also applies to insurance contracts. "We would love if the insurance company fully covered our losses if we had an accident or if our houses burned down,” said Per Strömberg on the Nobel Committee. But “if we know that we are fully covered” — that is, that we have no risk — “we are not going to take as well care of our property as we otherwise would have. ”Enter deductibles and copays. These tools, some say, provide us incentives for taking care of our homes and our health.
Economist Oliver Hart studied a different aspect of contracts: the reality that most of them are incomplete. What does that mean? Since no one can predict the future, no contract can anticipate future circumstances. Thus, a contract “must specify who has the right to decide what to do when the parties cannot agree,” explained the Nobel committee. Another aspect of Hart’s work on incomplete contracts examined whether certain services are better provided by the government or by a private company.
Social contract theory is an ancient philosophical idea that states that an individual's ethical and political obligations relate to an agreement he has with every other individual within a society. The agreement can be written, as in the form of laws, or it can be a tacit agreement, an unspoken or unwritten agreement of social norms and customs. In business, social contract theory includes the obligations that businesses of all sizes owe to the communities in which they operate and to the world as a whole. This involves corporate philanthropy, corporate social responsibility and corporate governance. In 2012, McKinsey & Co. conducted a study of the changing face of businesses in the United States. The study found that 84 percent of corporate executives and small business owners believe society as a whole expects corporations to take an active role in social, political and environmental issues. Not only do consumers expect businesses to obey the law, but they also expect businesses to reinvest in their communities and to help struggling people and nonprofit organizations in meeting their needs.
The rightful emphasis on selecting the overall Key Performance Indicators with congenial environment for complete harmony and balance in the work place not only will enable the organisations to achieve the two primary goals i.e. maximisation of shareholders return and net worth of the corporate but also in turn ensures development of human resource, comply within the set rules and guidances, obliging the other stakeholders rights, contributing to the society and overall give a healthy longevity to the organisation

The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks in different positions

Nobel Economics Prize for 2016

For this year, 2016 Britains Oliver Hart and Finlands Bengt Holmstrom won the Nobel Economics Prize for work that addresses a host of questions from how best to reward executives to whether schools and prisons should be privately owned

The penalties and fines imposed by the regulators on the banks for transacting specially breaching the anti sanction countries or persons is like pages of a horror book stories. It is really mind boggling to go through the numbers which some of these global banks had to pay as penalties. BNP Paribas paid almost $8.9 billion in penalties and pled guilty to settle charges it concealed roughly $8.8 billion of transactions with countries like Sudan, Iran and Cuba. The French government has protested the penalty, saying it was too high, and President Francois Hollande raised the issue personally with President Obama in early June. But in the end, the Justice Department said BNP Paribas did not appropriately cooperate with U.S. authorities, necessitating a high fine. The previous record-holder for largest sanctions fine was HSBC, which in December 2012 paid nearly $1.3 billion as part of a deferred prosecution agreement (The bank also had to pay an additional $665 million in civil penalties). HSBC was accused of conducting transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma, all of which were on the sanctions list. Federal authorities also said HSBC allegedly helped to launder around $881 million in drug proceeds through the U.S. financial system. Standard Chartered Bank was fined USD 227 million to transfer wire transfer from clients in Iran, Sudan, Libya and Burma. These are couple of examples of hefty penalties by the global behemoth of banking industry. The story of collapse of Baring Brothers due to the trading activities of Nick Leeson is a classic story of corporate greed. The Pay for Performance is a favourite management buzz word. The variable portion of the annual compensation like stocks, options and other fringe benefits made the corporate high flyers to tick and drive the corporates with motive of profit maximisation. Though profit is the ultimate driver for any corporates but the contracts for the top brasses are made in the form that the risk of breach of corporate governance and flaunting of rules and regulations where a major area of entire operations remain unexposed. The penalties and fines imposed on the top banks or other corporates have become very common in the global environment The Nobel Memorial Prize for Economic Science (Swedish National Banks Prize in Economic Science in memory of Alfred Nobel) commonly referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics, and generally regarded as the most prestigious award for that field. The prize was established in 1968 by a donation from Swedens central bank, the Sveriges Riksbank on the banks 300th anniversary. Although it is not one of the prizes that Alfred Nobel established in his will in 1895, it is referred to along with the other Nobel Prize by the Nobel Foundation. Winners are announced with the other Nobel Prize winners, and receive the award at the same ceremony. It became especially relevant in the years since the 2008 financial crisis, which was blamed on the short-term risk encouraged by huge cash bonuses paid to investment bankers. It also touches on themes of moral hazard, which arises where those that take the risks dont share in the costs of failure. In a summary, the Contract Theory may be briefed in the following: 1. Contract theory has its roots in the 1700s. Adam Smith argued that crop sharing contract may not necessarily motivate the tenants to improve on the quality of the land. The theory was later revisited in the 1930s when American business executive Chester Barnard considered how to get employees to put more effort into their work in big companies. Barnard is considered the pioneering author related to management theory and organisational studies. 2. The theory looks at the difficulty of tying pay to performance. A company might pay a CEO based on an increase in stock-market value, but this could end up being just luck. In the late 1970s and early 80s, work by Holmstrm on the Informativeness Principle helped develop models of performance that counterbalanced external factors beyond the control of managers. 3. Contract theory also looks at short-term incentives and the problem that managers might prioritise quick gains over future stability. In the 1990s Holmstrm developed the Multitasking Model, which provided a way of measuring this effect. 4. The model has been expanded to capture the moral hazard of teamwork, to understand that some of the employees piggyback on the performance of others while some of the employees are always focused on the future career progression. In these cases, some of the employees may be motivated to assume more risks while others remain risk averse. 5. Oliver Harts work focuses on the idea of incomplete contracts and their relationship to property rights. 6. The theory goes that almost all contracts are incomplete because performance can not be measured perfectly. Even if you could measure it accurately, it would be too complex to reflect in a contract as the contracts do not only include quantitative but intangibles with in it. 7. The interests of various stakeholders including shareholders, managers and regulators have been tested under the stressed situation like bankruptcy to hold the theory. 8. The work is important and has far-reaching applications. Here is what the Academy said: It generates precise hypotheses that can be confronted with empirical data and lays an intellectual foundation for the design of various policies and institutions, from bankruptcy legislation to political constitutions. As the Nobel committee explained, In industries with high risk, payment should thus be relatively more biased towards a fixed salary to offer employees stability while in more stable environments it should be more biased towards a performance measure to give employees incentive to work harder and not become complacent. This balance between risk and incentives also applies to insurance contracts. We would love if the insurance company fully covered our losses if we had an accident or if our houses burned down, said Per Strmberg on the Nobel Committee. But if we know that we are fully covered that is, that we have no risk we are not going to take as well care of our property as we otherwise would have. Enter deductibles and copays. These tools, some say, provide us incentives for taking care of our homes and our health. Economist Oliver Hart studied a different aspect of contracts: the reality that most of them are incomplete. What does that mean? Since no one can predict the future, no contract can anticipate future circumstances. Thus, a contract must specify who has the right to decide what to do when the parties cannot agree, explained the Nobel committee. Another aspect of Harts work on incomplete contracts examined whether certain services are better provided by the government or by a private company. Social contract theory is an ancient philosophical idea that states that an individuals ethical and political obligations relate to an agreement he has with every other individual within a society. The agreement can be written, as in the form of laws, or it can be a tacit agreement, an unspoken or unwritten agreement of social norms and customs. In business, social contract theory includes the obligations that businesses of all sizes owe to the communities in which they operate and to the world as a whole. This involves corporate philanthropy, corporate social responsibility and corporate governance. In 2012, McKinsey Co. conducted a study of the changing face of businesses in the United States. The study found that 84 percent of corporate executives and small business owners believe society as a whole expects corporations to take an active role in social, political and environmental issues. Not only do consumers expect businesses to obey the law, but they also expect businesses to reinvest in their communities and to help struggling people and nonprofit organizations in meeting their needs. The rightful emphasis on selecting the overall Key Performance Indicators with congenial environment for complete harmony and balance in the work place not only will enable the organisations to achieve the two primary goals i.e. maximisation of shareholders return and net worth of the corporate but also in turn ensures development of human resource, comply within the set rules and guidances, obliging the other stakeholders rights, contributing to the society and overall give a healthy longevity to the organisation The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks in different positions