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Obituaries

Franco Modigliani, 85; Winner of 1985 Nobel for Economics

September 26, 2003|Will Edwards | Bloomberg News

Franco Modigliani, winner of the 1985 Nobel Prize for Economics for his theories about people's savings habits and the functioning of financial markets, died overnight in his Cambridge, Mass., home, the Massachusetts Institute of Technology said.

Modigliani, 85, who was a professor emeritus at MIT, was an economist in the style of John Maynard Keynes, the influential economist whose general theory held that households increase their spending as income rises but not to the same extent.

Modigliani's "life-cycle" theory of savings, which most recently has been used to analyze pension systems, held that people save only for themselves and not for their descendants, and that a person's savings rate wanes with age. On a macroeconomic level, he concluded that aggregate savings depend mainly on the rate of growth in a nation's economy.

The Italian-born economist was a supporter of government intervention in economic policymaking, and recently was critical of the Bundesbank's policies and the European central bank's decision to cut interest rates three times in the past nine months.

"These were very controversial views that weren't shared by everybody," said Vito Tanzi, who served as undersecretary of finance for Italy from 2001 to 2003, and who met Modigliani on several occasions at economic conferences. "If you were with him at dinner, he monopolized the conversation, but he was always extremely interesting."

Modigliani, in his work with economist Merton Miller, also was credited with sculpting in the mid-1950s the modern theory of corporate finance.

The pair developed a model relating financial markets to investor expectations, looking at the effects that a company's structure and its future earnings potential have on the market value of its stock. Their findings showed that the value of a company's stock depends mainly on investors' expectations of the company's future earnings. In this, they argued that neither the volume nor the structure of a company's debts has an impact on its value.

A later paper crafted by Modigliani and Miller found that, for a given investment policy, the value of a company is also independent of its dividend policy. The economists' theories were widely held as breakthroughs in the arena of corporate finance.

Modigliani was born in Italy in June 1918, the son of a physician. He initially studied law and left Fascist Italy in 1939 for the U.S. because he was both Jewish and anti-Fascist. He became a U.S. citizen in 1944.

Modigliani earned his doctorate from the New School of Social Research in 1944 and taught there from 1944 to 1949. He was a professor at Carnegie Institute of Technology from 1952 to 1960, at Northwestern University from 1960 to 1962 and at MIT starting in 1962. He was president of the American Economic Assn. in 1976.

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