Optimal consumption choice with intolerance for declining standard of living
AbstractWe reconsider the optimal consumption choice of investors who do not tolerate any decline in their consumption rate. We connect the demand behavior of such agents to the behavior of standard time-additive agents. With consumption ratcheting, the investor demands the running maximum of the optimal plan a conventional time-additive investor with lower initial wealth would choose. The analysis is carried out for Lévy processes, in particular for jump-diffusions. We obtain explicit solutions for all Bernoulli utility functions, not only those of CRRA type.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Mathematical Economics.
Volume (Year): 45 (2009)
Issue (Month): 7-8 (July)
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Web page: http://www.elsevier.com/locate/jmateco
Intertemporal consumption choice; Habit formation; Nontime separable utility;
Other versions of this item:
- Frank Riedel, 2007. "Optimal consumption choice with intolerance for declining standard of living," Working Papers 394, Bielefeld University, Center for Mathematical Economics.
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
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