Ratchet consumption over finite and infinite planning horizons

John G. Watson and Jason S. Scott

Journal of Mathematical Economics, 2014, vol. 54, issue C, 84-96

Abstract: Ratchet consumers want their spending to always increase and never decrease. We find an optimal consumption rule for ratchet consumers by maximizing an expected utility that eschews spending declines, yet permits a range of choices for felicity and time preference functions. This solution can be tailored to fit both retirees with finite planning horizons and endowments with infinite planning horizons. We assume complete markets modeled by a pricing kernel generated by a Lévy process. When the kernel is log-normal, we obtain closed-form solutions for both finite and infinite horizons.

Keywords: Endowment; Retirement; Ratchet consumption; Installment option; Expected utility maximization (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:54:y:2014:i:c:p:84-96

DOI: 10.1016/j.jmateco.2014.09.001

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