Optimal consumption and portfolio selection with lower and upper bounds on consumption

Abstract

Abstract We investigate the optimal consumption and investment problem with lower and upper bounds on consumption constraints. We derive closed-form solutions by means of the dynamic programming approach. We also evaluate the effects of the optimal consumption and portfolio on consumption constraints and present some numerical/economic implications. In particular, we see that the upper bound on consumption acts as a bliss level in a quadratic utility model.

Keywords

• Consumption constraints
• Consumption/Investment problem
• CRRA utility
• Dynamic programming approach