Finite-Horizon Optimal Consumption and Investment with Upper and Lower Constraints on Consumption

Geonwoo Kim and Junkee Jeon ()
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Geonwoo Kim: School of Natural Sciences, Seoul National University of Science and Technology, Seoul 01811, Republic of Korea
Junkee Jeon: Department of Applied Mathematics, Kyung Hee University, Yongin 17104, Republic of Korea

Mathematics, 2025, vol. 13, issue 22, 1-21

Abstract: We study a finite-horizon optimal consumption and investment problem in a complete continuous-time market where consumption is restricted within fixed upper and lower bounds. Assuming constant relative risk aversion (CRRA) preferences, we employ the dual-martingale approach to reformulate the problem and derive closed-form integral representations for the dual value function and its derivatives. These results yield explicit feedback formulas for the optimal consumption, portfolio allocation, and wealth processes. We establish the duality theorem linking the primal and dual value functions and verify the regularity and convexity properties of the dual solution. Our results show that the upper and lower consumption bounds transform the linear Merton rule into a piecewise policy: consumption equals L when wealth is low, follows the unconstrained Merton ratio in the interior region, and is capped at H when wealth is high.

Keywords: finite-horizon optimization; consumption constraints; optimal investment; CRRA utility; duality; martingale approach (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2025
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