Optimal Consumption and Investment with Consumption Comfort Zones

We study an infinite-horizon consumption–investment problem in which an investor endogenously manages a consumption comfort zone above a fixed subsistence benchmark. Consumption can move freely within the prevailing admissible interval, while upward expansions of the upper endpoint are irreversible and costly. This captures downward rigidity not through a single ratcheting reference level but through the endogenous management of a sustainable expenditure range. Using the dual martingale method together with singular stochastic control, we reduce the problem to a one-sided singular control problem for the comfort-zone width process. The associated dual Hamilton–Jacobi–Bellman equation becomes a gradient-constrained free-boundary problem, which admits a one-dimensional reduction under CRRA utility. We characterize the optimal comfort-zone expansion rule, consumption policy, risky portfolio rule, and value function. Economically, the model implies infrequent upward revisions of the sustainable consumption ceiling, smoother consumption than in the frictionless Merton benchmark, and state-dependent portfolio behavior. A key implication of the additive specification is that proportional consumption flexibility shrinks as the upper endpoint rises, so higher consumption states become endogenously tighter and require a larger wealth buffer to sustain. The infinite-horizon formulation is interpreted as a stationary benchmark that isolates the economics of costly lifestyle upgrading.