The 2016 Nobel Prize for Economic Sciences was awarded to Dr.
Oliver Hart and Dr. Begnt Holmstrom for their remarkable work in
the field of Contract Theory. In this article, we provide an
overview of Contract Theory principles and how employment lawyers
can best utilize these principles to structure employment contracts
in areas of employee remuneration and incentivisation.
Introduction
Contract Theory is the study of contract design and contract
optimization - using economic, mathematical, and sociological tools
to design and interpret contracts. The cornerstone of Contract
Theory is the principle of party autonomy, implying that parties
are free to design their contracts in a manner that best reflects
their commercial intent. This principle becomes pertinent in the
event of a dispute, where courts employ the rules of interpretation
to discover the intent of the parties. Therefore, parties must
allocate sufficient resources towards designing a contract
