Consumption and Investment When Welfare Floors Change over Time
Abstract
We study consumption and investment over a finite horizon when continuation utility must stay above a welfare floor that changes over time, and the floor at the horizon acts as a terminal wealth floor. A cumulative multiplier reduces the problem to a parabolic obstacle problem. When relative risk aversion exceeds one, the intervention boundary exists at every interior date. When it is below one, the boundary exists exactly at the dates where a discounted transformation of the floor is locally increasing and sets a strict running record, so it can disappear and later reenter. We prove local regularity of the boundary, construct the dual value from the obstacle solution, and verify the optimal cumulative multiplier, whose moments are controlled through its representation as a running supremum. Strong duality identifies the exact lower endpoint of feasible wealth. With stochastic income in a complete market, the floor becomes the value of an outside option, which links the boundary to limited commitment and endogenous borrowing capacity.
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BibTeX
@misc{ha2026consumption,
title = {{Consumption and Investment When Welfare Floors Change over Time}},
author = {Gugyum Ha and Junkee Jeon and Takwon Kim},
howpublished = {arXiv},
year = {2026},
month = oct,
doi = {10.48550/arxiv.2610.09263},
eprint = {2610.09263},
archivePrefix = {arXiv},
url = {https://arxiv.org/abs/2610.09263},
}
RIS
TY - UNPB
TI - Consumption and Investment When Welfare Floors Change over Time
AU - Gugyum Ha
AU - Junkee Jeon
AU - Takwon Kim
PY - 2026
DA - 2026/10/08
PB - arXiv
DO - 10.48550/arxiv.2610.09263
UR - https://arxiv.org/abs/2610.09263
AB - We study consumption and investment over a finite horizon when continuation utility must stay above a welfare floor that changes over time, and the floor at the horizon acts as a terminal wealth floor. A cumulative multiplier reduces the problem to a parabolic obstacle problem. When relative risk aversion exceeds one, the intervention boundary exists at every interior date. When it is below one, the boundary exists exactly at the dates where a discounted transformation of the floor is locally increasing and sets a strict running record, so it can disappear and later reenter. We prove local regularity of the boundary, construct the dual value from the obstacle solution, and verify the optimal cumulative multiplier, whose moments are controlled through its representation as a running supremum. Strong duality identifies the exact lower endpoint of feasible wealth. With stochastic income in a complete market, the floor becomes the value of an outside option, which links the boundary to limited commitment and endogenous borrowing capacity.
ER -