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Effect of labour income on the optimal bankruptcy problem

Author

Listed:
  • Guodong Ding

    (Politecnico di Milano)

  • Daniele Marazzina

    (Politecnico di Milano)

Abstract

In this paper we deal with the optimal bankruptcy problem for agents who can optimally allocate their consumption rate, the amount of capital invested in the risky asset, as well as their leisure time. In our framework, the agents are endowed by an initial debt, and they are required to repay their debt continuously. Declaring bankruptcy, the debt repayment is exempted at the cost of a wealth shrinkage. We implement the duality method to solve the problem analytically and conduct a sensitivity analysis to the bankruptcy cost and benefit parameters. Introducing the flexible leisure/working rate, and therefore the labour income, into the bankruptcy model, we investigate its effect on the optimal strategies.

Suggested Citation

  • Guodong Ding & Daniele Marazzina, 2024. "Effect of labour income on the optimal bankruptcy problem," Annals of Operations Research, Springer, vol. 336(1), pages 773-795, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-023-05166-z
    DOI: 10.1007/s10479-023-05166-z
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