Effect of labour income on the optimal bankruptcy problem

Guodong Ding and Daniele Marazzina ()
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Guodong Ding: Politecnico di Milano
Daniele Marazzina: Politecnico di Milano

Annals of Operations Research, 2024, vol. 336, issue 1, No 25, 773-795

Abstract: Abstract In this paper we deal with the optimal bankruptcy problem for agents who can optimally allocate their consumption rate, the amount of capital invested in the risky asset, as well as their leisure time. In our framework, the agents are endowed by an initial debt, and they are required to repay their debt continuously. Declaring bankruptcy, the debt repayment is exempted at the cost of a wealth shrinkage. We implement the duality method to solve the problem analytically and conduct a sensitivity analysis to the bankruptcy cost and benefit parameters. Introducing the flexible leisure/working rate, and therefore the labour income, into the bankruptcy model, we investigate its effect on the optimal strategies.

Keywords: Power utility optimization; Bankruptcy stopping time; Consumption-portfolio-leisure controls; Legendre–Fenchel transform; Variational inequalities (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-023-05166-z

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