CONSUMPTION AND INVESTMENT STRATEGIES WITH HYPERBOLIC DISCOUNTING AND LABOR INCOME

We investigate the optimal consumption and investment decision problem of an agent whose time preference is time-inconsistent. Specicfically, for a time-separable utility function, the agent s subjective discount factor is supposed to be changed randomly in the future. We provide closed-form solutions in the presence of income process. The method can be extended into the case with a stochastic income process.

Abstract

1. Introduction

2. The Model

3. The Solution: Constant Income

4. Stochastic Income

5. Conclusion

References

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