Optimal Consumption, Leisure, and Investment with Partial Borrowing Constraints over a Finite Horizon

We study an optimal consumption, leisure, and investment problem over a finite horizon in a continuous-time financial market with partial borrowing constraints. The agent derives utility from consumption and leisure, with preferences represented by a Cobb–Douglas utility function. The agent allocates time between work and leisure, earning wage income based on working hours. A key feature of our model is a partial borrowing constraint that limits the agent’s debt capacity to a fraction of the present value of their maximum future labor income. We employ the dual-martingale approach to derive the optimal consumption, leisure, and investment strategies. The problem reduces to solving a variational inequality with a free boundary, which we analyze using analytical and numerical methods. We provide an integral equation representation of the free boundary and solve it numerically via a recursive integration method. Our results highlight the impact of the borrowing constraint on the agent’s optimal decisions and the interplay between labor supply, consumption, and portfolio choice.

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Publication Details

Journal
Mathematics
Published
2025-03-18
DOI
https://doi.org/10.3390/math13060989
Citations
2
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
4.42

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article

Optimal Consumption, Leisure, and Investment with Partial Borrowing Constraints over a Finite Horizon

Geonwoo Kim, Junkee Jeon
2 citations
Mathematics
Stochastic processes and financial applications
4.42
article

Optimal Consumption, Leisure, and Investment with Partial Borrowing Constraints over a Finite Horizon

Geonwoo Kim, Junkee Jeon
article en
2 citations

Abstract

We study an optimal consumption, leisure, and investment problem over a finite horizon in a continuous-time financial market with partial borrowing constraints. The agent derives utility from consumption and leisure, with preferences represented by a Cobb–Douglas utility function. The agent allocates time between work and leisure, earning wage income based on working hours. A key feature of our model is a partial borrowing constraint that limits the agent’s debt capacity to a fraction of the present value of their maximum future labor income. We employ the dual-martingale approach to derive the optimal consumption, leisure, and investment strategies. The problem reduces to solving a variational inequality with a free boundary, which we analyze using analytical and numerical methods. We provide an integral equation representation of the free boundary and solve it numerically via a recursive integration method. Our results highlight the impact of the borrowing constraint on the agent’s optimal decisions and the interplay between labor supply, consumption, and portfolio choice.

MathematicsVol. 13(6)
Seoul National University of Science and Technology (KR), Kyung Hee University (KR)
Seoul National University of Science and Technology
Openalex Percentile: Top 7%
Stochastic processes and financial applications
4.42
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