Franco Modigliani, an ebullient professor at the Massachusetts Institute of Technology, yesterday was awarded the Nobel Prize in economics for work on how people save and consume over their lifetimes and on how corporate assets should be valued.
Modigliani is among the most highly respected economists in the United States, both because of the seminal nature of his research and its extraordinarily wide scope. In addition to the work cited by the Nobel Committee, he is well known for his analysis of the role of money in the economy and as one of the creators of the short-term mathematical model used by the Federal Reserve for forecasting and analyzing the economy.
"I'm very, very pleased . . . that my work has been recognized. This is a nice way to crown my career," Modigliani said. "I will use the prize money in accordance with my own theories of how people behave -- namely, distribute it over the rest of my life. I'm not going to go on a binge. I will use it gradually. That's what my theory says people do."
Modigliani, 67, was born in Rome and became a U.S. citizen in 1946. He still has close ties with Italy, and many of his articles have been written in Italian. Some of his research has focused on the Italian economy as well.
Some other prominent economists praised the Royal Swedish Academy's selection. James Tobin of Yale, one of the dozen American Nobel laureates in economics chosen since the award was begun in 1969, reacted with "jubilation. I am only wondering why it took them so long," Tobin declared.
Tobin described Modigliani as "a very versatile guy" whose work stretches back to the World War II period, when he wrote the first formal theoretical analysis that incorporated monetary factors into the theories of Lord Maynard Keynes on which so much of modern economic analysis has been based.
In the 1950s, Modigliani turned his attention to the issues of saving and consumption because, he said yesterday, "saving plays a very important role in economic life because it is what permits investment and capital formation, which is in turn what is behind growth and well-being.
"I have been studying why people accumulate or don't, and I have a view that is quite different from what used to be believed before," Modigliani said. "It is related to the notion that the major reason why people save is for retirement or for major expenditure."
The so-called life-cycle hypothesis, developed with the assistance of a student, the late Richard Brumberg, holds that individuals accumulate savings primarily in anticipation of retirement needs. Since its publication in 1954, the theory has been used as the theoretical basis for the study of pension and retirement systems, the Royal Swedish Academy said.
"In particular, it has proved an ideal tool for analyses of the effects of different pension systems," the academy said. "Most of these analyses have indicated that the introduction of a general pension system leads to a decline in private saving."
The validity of the life-cycle theory has been challenged in recent years by economists such as Lawrence Summers of Harvard, partly on the difficult analytical issue of bequests of wealth not consumed during an individual's lifetime. Nevertheless, said Tobin, Modigliani's theoretical and empirical work on the subject has served as a point of departure for a great deal of additional research. "There has been a lot of discussion, but Franco is coming out pretty well," Tobin said.
Modigliani's other work for which he was honored was published in 1958 with Merton Miller of the University of Chicago. Together they proved what is known as the Modigliani-Miller theorem, which states that the value of a corporation is not dependent on the relative amounts of debt and equity used to finance it. Instead, it is the value of the underlying assets themselves, as shown by the market value of the company's shares.
Prior to that work, "people had used crude measures" that produced erroneous results in looking at how corporate assets should be valued, said Allan H. Meltzer of Carnegie-Mellon University, where Modigliani was teaching when the theorem's proof was published. Meltzer called the theorem "one of two main forces in the modern theory of finance," at least from the point of view of economics. The work in asset-price theory for which Tobin received his prize is the other, Meltzer said.
Modigliani's work "explains what we see and helps us understand the world," Prof. Assar Lindbeck, a member of the prize committee, said after the award was announced.
The Modigliani-Miller theorem has had important implications for the theory of investment decisions, the academy said, and represents "a decisive breakthrough for the theory of corporate finance."
The announcement marked the 13th time in 17 years that an American has won or shared the prize, known as the Alfred Nobel Memorial Prize in Economics. It was established in 1969 by Sweden's central bank, the Riksbank. The other Nobel prizes were begun in 1895 under terms of the will of Nobel, the inventor of dynamite.
Among other American winners was Milton Friedman, widely known for his work linking changes in the money supply to changes in the economy. Friedman was honored for his "permanent-income" hypothesis, which holds that consumption in an economy does not respond completely to short-term fluctuations in income. In many ways, Friedman's permanent-income hypothesis represents a sort of averaging across an entire economy of the individual life-cycle behavior described by Modigliani.
Modigliani was born in Rome in 1918. He received a doctorate in jurisprudence from the University of Rome in 1939 and a doctorate in social science from the New School for Social Research in New York in 1944, and holds a half-dozen honorary degrees. He came to the United States in 1939 with his wife after fleeing the fascist regime of Benito Mussolini.
All the awards, including the memorial economics prize, carry a cash award this year set at 1.8 million Swedish kronor, about $225,000. It currently is tax free, but the Reagan administration's tax reform plan would make such awards taxable beginning next year.