Abstract
In this chapter we study the consumption behavior of an agent in the dynamic framework of consumption/investment decision making that allows the presence of a subsistence consumption level and the possibility of bankruptcy. The agent’s consumption utility is assumed to be represented by a strictly increasing, strictly concave, continuously differentiable function in the general case and by a HARA-type function in the special case treated in the chapter. It is known that the optimal consumption increases with wealth. Here we show that in general the optimal consumption is a nondecreasing function of the bankruptcy value. In the HARA case we obtain a nearly explicit characterization of the consumption behavior.
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References
Karatzas, I., Lehoczky, J., Sethi, S. P. and Shreve, S. (1986). Explicit Solution of a General Consumption/Investment Problem. Mathematics of Operations Research 11 261–294; Chapter 2 in this volume.
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Sethi, S.P., Taksar, M. and Presman, E. (1992). Explicit Solution of a General Consumption/Portfolio Problem with Subsistence Consumption and Bankruptcy. Journal of Economic Dynamics and Control 16 747–768; Chapter 6 in this volume.
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© 1997 Springer Science+Business Media New York
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Presman, E.L. (1997). Consumption Behavior in Investment/Consumption Problems. In: Optimal Consumption and Investment with Bankruptcy. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6257-3_9
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DOI: https://doi.org/10.1007/978-1-4615-6257-3_9
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4613-7871-6
Online ISBN: 978-1-4615-6257-3
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