Oliver Hart Named First Andrew Furer Professor of Economics

Economic theorist Oliver D. Hart is the first Andrew E. Furer Professor of Economics in the Faculty of Arts and Sciences (FAS).

"Andy Furer's generous gift allows us both to honor an outstanding economist on the Faculty, Oliver Hart, and to recruit a new professor further to strengthen the economics department," said Dean of the Faculty of Arts and Sciences Jeremy R. Knowles.

Knowles continued: "The fact that economics is one of our largest concentrations in the College makes this splendid gift doubly welcome."

"Hart's research contributions have revolutionized the field of corporate finance," added Dale W. Jorgenson, Frederic E. Abbe Professor of Economics and former chair of the Department of Economics.

Hart: Power key to economic theories

"Economists tend to think of resources being allocated through markets," Hart commented, recalling the question posed in 1937 by Nobel Prize winner Ronald Coase: If markets are so good at allocating resources, why do we need firms?

Hart has spent much time reflecting on that question, from examining the boundaries of firms to exploring the efficacy of contracts. The economic theories Hart has developed focus on the division of power in economic relationships. "Power is not a standard feature of economic theory," he commented.

"Economists recognize that sometimes markets don't work. If a party makes a relationship-specific investment, such as moving its electric generating company near a coal mine, it is no longer buying coal on the open market. The company has committed itself to buying from the neighboring coal mine."

Hart concentrates on what happens when parties -- in this case the electric generating company and the coal mine -- write a contract that does not cover all future events, a situation termed "contractual incompleteness."

"Wanting to ensure a steady coal supply, the company writes a long-term contract, but it is impossible to anticipate every conceivable eventuality," Hart explained. "What if a new environmental law prohibits the current coal excavation method? What if the coal is too impure to be efficiently used by the electric generating company? Then, a firm needs to renegotiate, and the division of power established by the original contract becomes very important."

Writing in his 1995 book Firms, Contracts, and Financial Structure, Hart noted: "Since contracts are always incomplete, the ex post allocation of power (or control) matters."

Hart explores the consequences of division of power for the boundaries of firms. For example, in the above scenario, it might make sense for the electric generating company to buy the coal mine, so as to gain more power in their relationship. Hart also applies his theories about contractual incompleteness to understand corporate finance.

For instance, Hart considers the different rights of divergent groups of investors in a firm. "Shareholders have the right to choose the firm's management team. Creditors have the right to foreclose on the firm's assets should it default. Does this power structure make sense?" Bankruptcy, he explained, then becomes the mechanism for shifting power from shareholders to creditors.

"Current bankruptcy reorganization procedures are flawed because they mix the decision of who should get what with the decision of what should happen to a bankrupt company," Hart added. Concluding that the current laws "make little sense from an economic point of view," he and colleagues Philippe Aghion of the University College London and John Moore of the London School of Economics (LSE) crafted a new bankruptcy law based on their economic theories. "Bankruptcy is an indication that something is wrong with management rather than with the company itself," Hart wrote. "The appropriate response is to allow new management teams the opportunity to replace existing management."

Hart and his colleagues met with senior government officials in the United States, the United Kingdom, China, and Mexico to try to convince them to adopt their new bankruptcy procedures. No takers yet, but Hart is hopeful.

This fall, Hart is teaching a graduate course in contract theory for doctoral students in economics. With Economics Professor Andrei Shleifer, he organizes a lunchtime seminar for economics students to present their papers -- it is one of the Economics Department's many "brown-bag lunch" events. With Lucian A. Bebchuk, professor of law, economics, and finance, and Louis Kaplow, professor of law, Hart teaches a research seminar on law and economics at the Law School.

Born in Britain, Hart earned a B.A. in mathematics at King's College, Cambridge, and an M.A. in economics at Warwick University. He went to Princeton for a Ph.D. in economics, and then returned to Britain, where he became a fellow at Churchill College, Cambridge, then a professor of economics at LSE.

In 1984, Hart again crossed the Atlantic, this time headed for M.I.T. He spent one year as a visiting scholar at Harvard Law School, another as Marvin Bower Fellow at Harvard Business School, and a third as British Petroleum Visiting Centennial Professor at LSE before settling in the Faculty of Arts and Sciences in 1993 as professor of economics.

Hart is married to writer Rita B. Goldberg, who lectures on literature in the FAS, advises undergraduates on their theses, and teaches at the Extension School. The couple have two sons, Daniel, 20, and Benjamin, 15.

Hart said that he is deeply honored to be the first Andrew Furer Professor of Economics.

Furer's career combined law and economics

Reflecting on his decision to establish a professorship, Andrew Furer '75, JD '77, said, "Since I was an economics concentrator and a Law School graduate, I was interested in putting the two disciplines together to gain a unique insight into how the world works."

Furer says that several of his College economics classes were seminal in his own career. "They gave me a way of analyzing the real world. I wanted to bolster the strength of the Economics Department and was so pleased that someone at Harvard -- Oliver Hart -- was already combining precisely these interests."

Furer graduated from the College in three years and, in 1974, entered Harvard Law School, where he received a J.D. magna cum laude.

He clerked for Judge Arnold Raum '29, LLB '32, of the U.S. Tax Court in Washington, D.C., for two years before joining a small tax law firm in Los Angeles. Furer returned to Washington, D.C., to work at the U.S. Department of Treasury, where he was associate tax legislative counsel. He then joined Salomon Brothers in New York as an investment banker in mortgage-backed securities. In 1987, Furer became a managing partner of Castine Partners, L.P., a private investment partnership affiliated with the Robert Bass Group (now Keystone Inc.).

Since 1993, Andrew Furer and his wife, Eloisa, have lived in Geneva and Gstaad, Switzerland, with their son, Alexander. Later this month, the Furers will move to Incline Village, Nev.; Alexander has enrolled at the Groton School in Massachusetts.

After returning to Cambridge recently to celebrate Hart's appointment to the professorship, Furer said that the visit's highlight was a dinner with several members of the economics faculty. "It was a busman's holiday -- we had an engaging discussion about the respective interests of the faculty, and I appreciated hearing about their work in law and economics."

He especially enjoyed the opportunity to acquaint himself with Hart and his work. "I found remarkable the number of interests we have in common. I, in business, and Oliver, in academia, have addressed many of the same issues."

Gift also provides financial aid

In addition to establishing an endowed chair in economics, Furer also created the Furer Family Cornerstone Scholarship, providing financial aid to four students each year.

"I received financial assistance when I was an undergraduate and I remember what a struggle it was to meet expenses," Furer said. "Since college costs have increased and federal grants have been cut back, I am sure that the level of burden for today's students is as great -- if not greater -- than it was for me. Helping people have the wonderful opportunity that I was able to enjoy at Harvard is very gratifying."

Andy and Ellie Furer chose to designate their scholarship to benefit students from the Philippines (Ellie's native country), of Filipino ethnic background, or with other significant ties to the Philippines. The scholarship may also benefit College students from Southeast Asian countries or with ties to Southeast Asia.

"I'm proud that Asians are much better represented at the College now than when I was a student, and we are excited to be helping talented Filipinos come to Harvard," Andy Furer added.