Franco Modigliani

Franco Modigliani
(1918)

Italian-born American economist and finance educator who received the Nobel Prize for Economics in 1985 for his work on household savings and the dynamics of financial markets.
The son of a Jewish physician, Modigliani initially studied law but fled Fascist Italy in 1939 for the United States, in which country he became a naturalized citizen in 1946. He studied economics at the New School for Social Research and obtained his doctorate there in 1944. Modigliani went on to hold teaching positions at a number of American universities, notably the post of professor of economics at the Massachusetts Institute of Technology from 1962 on.

Modigliani received the Nobel Prize for his pioneering research in several fields of economic theory that had practical applications. One of these was his analysis of personal savings, termed the life-cycle theory. The theory posits that individuals build up a store of wealth during their younger working lives for the purpose of consuming these savings during their own old age, not for the purpose of passing them on to their descendants. The theory helped explain the varying rates of savings in societies with relatively younger or older populations and proved useful in predicting the future effects of various pension plans.

Modigliani also did important research with the American economist Merton H. Miller on financial markets, particularly on the respective effects that a company's financial structure (e.g., the structure and size of its debt) and its future earning potential have on the market value of its stock. They found, in the so-called Modigliani-Miller theorem, that the market value of a company's stock depends primarily on investors' expectations of what that company will earn in the future. This dictum had come to be regarded as self-evident by the 1970s, and the technique Modigliani invented for calculating the value of a company's expected future earnings became a basic tool in corporate decision-making and finance.