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Optimal consumption choice with intolerance for declining standard of living

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Author Info
Riedel, Frank

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Abstract

We 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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Publisher Info
Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 45 (2009)
Issue (Month): 7-8 (July)
Pages: 449-464
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Handle: RePEc:eee:mateco:v:45:y:2009:i:7-8:p:449-464

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Web page: http://www.elsevier.com/locate/jmateco

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Related research
Keywords: Intertemporal consumption choice; Habit formation; Nontime separable utility;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frank Riedel & Peter Bank, 2001. "Existence and structure of stochastic equilibria with intertemporal substitution," Finance and Stochastics, Springer, vol. 5(4), pages 487-509. [Downloadable!] (restricted)
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  2. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October. [Downloadable!] (restricted)
  3. Back, Kerry, 1991. "Asset pricing for general processes," Journal of Mathematical Economics, Elsevier, vol. 20(4), pages 371-395. [Downloadable!] (restricted)
  4. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June. [Downloadable!] (restricted)
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This page was last updated on 2009-11-7.

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