Nobel prize in economics won by Oliver Hart and Bengt Holmström

The 2016 Nobel prize for Economics has been awarded to London-born Oliver Hart and Finland's Bengt Holmström for their work in the area of contract theory.

Harvard University professor Hart and MIT's Holmström were announced by the Royal Swedish Academy of Sciences on Monday as the 2016 winners of the coveted prize.

"The new theoretical tools created by Hart and Holmström are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design," the academy said in a statement.

Hart was born in London but has lived most of his professional life in the United States, and is the Andrew E. Furer Professor of Economics at Harvard University.

Holmström is originally from Finland and is currently the Paul A. Samuelson Professor of Economics at Massachusetts Institute of Technology.

The Nobel prizes for economic sciences, physics, chemistry, medicine, peace and literature are given annually in recognition of groundbreaking work completed in each field.

Previous winners of the prestigious economic prize include Milton Friedman, Joseph Stiglitz and last year's winner Angus Deaton.

"Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions," the press release added.