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In response to the growing criticisms to shareholder primacy, Oliver Hart, a Nobel Economics Prize recipient, and Luigi Zingales, a very well-known finance professor, have offered a revision to Milton Friedman's dominant account. Seeking to incorporate social and moral concerns into the objective function of the firm, they have proposed that managers should maximize shareholder welfare instead of shareholder value. Their account has been highly influential and reflects many of the substantive and methodological assumptions of corporate governance scholars within the law and economics literature. In this paper, we engage closely with their account from a normative perspective, unearthing and criticizing the implications of many of these assumptions. In doing so, we also formulate a set of principles necessary to ensure the ethical legitimacy of any proposal that puts shareholders at the center of the firm's objective function. [ABSTRACT FROM AUTHOR]

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This article reviews the contribution of Hart and Holmström, the 2016 Nobel Laureates in economics. Holmström's work on the principal-agent problem answered questions as to what should (and should not) be included in an incentive contract. His work helped explain the simple structure of incentive contracts we typically observe in the real world. The models he developed have been used to address questions of CEO compensation, organizational design and optimal regulation. A key element of Hart's research focused on the question of what are the optimal boundaries of a firm (and indeed, what a firm actually is). In doing so he developed the incomplete-contracts framework, which has subsequently been used to explain many economic phenomena whenever renegotiation is important, including authority and decision-making structures in firms, why financial contracts look the way they do, and various questions in international trade and public policy. [ABSTRACT FROM AUTHOR]

A revised version of the December 8, 2016 speech by economist Oliver Hart upon receiving the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel is presented. Topics include the author's work on the optimal allocation of residual control rights, the implications of property rights theory (PRT) for financial contracting, and economic aspects of public ownership and private ownership.

We briefly summarize the contributions of Oliver Hart and Bengt Holmström, two key founders of modern contract theory, and describe their significance for the analysis of organizations and institutions. We then discuss the foundations of modern contract theory and review some criticisms related to modeling strategy, assumptions about knowledge and cognition, and relevance. We conclude with some suggestions for advancing contract theory in a world of uncertainty, complexity, and entrepreneurship. [ABSTRACT FROM AUTHOR]

The article profiles Oliver Hart, Fellow of American Finance Association for 2016. He was born in London, England in 1948 and was educated at University College School and studied mathematics at Cambridge before transitioning to economics at Warwick University. His thesis and resulting paper landed him to his first job at Essex University and his second job at Cambridge. It cites his collaboration with Sanford Grossman which led to a 1980 Bell Journal paper on free rider problem in takeovers.

Sanford Grossman and Oliver Hart used the theory of incomplete contracts to develop answers to the question ''What is a firm, and what determines its boundaries??'' in their path-breaking paper on ''The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration'' ( Journal of Political Economy, 1986, vol. 94, no. 4). Perhaps the central issue is that economic actors are only boundedly rational and cannot anticipate all possible contingencies. It might well be that certain states of nature or actions cannot be verified by third parties after they arise, like certain qualities of a good to be traded in the future, and thus cannot be written into an enforceable contract. When contracts are incomplete, and consequently not all uses of an asset can be specified in advance, any contract negotiated in advance must leave some discretion over the use of the assets; and the ''owner'' of the firm is the party to whom the residual rights of control have been allocated at the contracting stage. The optimal allocation of property rights--or governance structure--is one that minimizes efficiency losses. This produces a theory of ownership and vertical integration as well as a theory of the firm. First we spell out Grossman and Hart's argument using a simple numerical example. Then we show how the incomplete contracts approach can be used to analyze the firms' internal organization; the firms' financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. We discuss several criticisms of the incomplete contracts/property rights methodology and review recent developments of the incomplete contracts approach. [ABSTRACT FROM AUTHOR]

The article considers how competition affects innovative activity through a firm's organizational structure. The article argues that a moderate increase in product market competition will reduce a producer's incentive to integrate with suppliers. Nonintegrated suppliers will fare better in this case, and so have more initiative to innovate. Too much competition will raise the producers incentive to integrate with suppliers to take advantage of innovations. The article discusses this finding in light of Oliver Williamson's Transaction Cost Economics and Sanford Grossman, Oliver Hart, and John Moore's Property Right Theory.

The article announces that economists Bengt Holmström and Oliver Hart will share the 2016 Nobel Prize in Economic Sciences for their work on contract theory.

I survey the influence of Grossman and Hart's (1986. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” 94 Journal of Political Economy 691–719.) seminal paper in the field of International Trade. I discuss the implementation of the theory in open-economy environments and its implications for the international organization of production and the structure of international trade flows. I also review empirical work suggestive of the empirical relevance of the property-rights theory. Along the way, I develop novel theoretical results and also outline some of the key limitations of existing contributions. (JEL D23, F10, F12, F14, F21, F23, L22, L23). [ABSTRACT FROM PUBLISHER]