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.
Authors
- Geonwoo Kim (ORCID: https://orcid.org/0000-0002-8930-1154)
- Junkee Jeon (ORCID: https://orcid.org/0000-0002-1091-9745)
Institutions
- Seoul National University of Science and Technology (KR)
- Kyung Hee University (KR)
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
Funders
- Seoul National University of Science and Technology