Franco Modigliani (1918–2003)
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Who They Were
Franco Modigliani (1918-2003) was an Italian-born American economist who emigrated in the late 1930s and built his career in the United States, for many years at MIT. His work spanned the economics of saving, corporate finance and macroeconomics, and he became one of the most influential economists of the postwar period. He is best known for the life-cycle hypothesis of household saving and, in finance, for the Modigliani-Miller theorem on corporate capital structure. In 1985 he received the Nobel Memorial Prize in Economic Sciences for his pioneering analyses of saving and of financial markets. He also contributed to the theory of interest rates and the term structure, and engaged actively in macroeconomic policy debate. He belongs to a line of thinkers, alongside Keynes and Milton Friedman, who reshaped how economists understand household saving.
Key Contributions
Working with Richard Brumberg, Modigliani developed the life-cycle hypothesis in 1954: individuals form a view of their lifetime resources and try to keep consumption relatively even across the whole span, borrowing when young, accumulating during peak earning years, and drawing down in retirement, so that consumption is smoother than income. This gave a powerful account of why and how households save, complementing Milton Friedman's related permanent income hypothesis. In corporate finance, the Modigliani-Miller theorem established conditions under which a firm's value is independent of how it is financed. He also contributed to interest-rate theory: with Richard Sutch in 1966 he advanced the preferred-habitat theory of the term structure, in which investors favour particular maturities but will leave them for a sufficient price. He received the Nobel Memorial Prize in 1985.
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Italian-American economist and 1985 Nobel laureate known for the life-cycle hypothesis of saving and the Modigliani-Miller theorem. Play the games that feature Franco Modigliani: