Franco Modigliani, 1918-2003, was an American, Italian born economist, and Professor at the Massachusetts Institute of Technology. He has mainly worked in the fields of savings and financial markets, and his pioneering analyses in these subjects granted him the Nobel Prize in Economic Sciences in 1985.
The life-cycle hypothesis raised by Modigliani in his “The Life Cycle Hypothesis of Savings, the Demand for Wealth and the Supply of Capital”, 1966, tries to explain and rationalize the level of savings in the economy. As Modigliani explained, consumers seek for stable consumption levels throughout their lives; this is why they save during their working years since later, during their retirement, they will only have their savings. This proposition complements Friedman´s permanent income hypothesis, whereby consumers adjust their consumptions patterns when their income varies.
Modigliani also developed important theorems in the corporate finance area. The Modigliani-Miller theorem, formulated along with Merton Miller, demonstrates that under certain conditions, a firm´s value will remain unchanged, independently of weather equity or debt financing is used. Modigliani addresses this topic in his article “The Cost of Capital, Corporation Finance and the Theory of Investment”, 1958.