A closed-form solution for the continuous-time consumption model with endogenous labor income |
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Authors: | Aihua Zhang |
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Institution: | 1. Business School, University of Nottingham, China Campus, Administration Building, 199 Taikang East Road, 315100, Ningbo, China
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Abstract: | In this paper, we study the consumption, labor supply, and portfolio decisions of an infinitely lived individual who receives
a certain wage rate and income from investment into a risky asset and a risk-free bond. Uncertainty about labor income arises
endogenously, because labor supply evolves randomly over time in response to changes in financial wealth. We derive closed-form
solutions for optimal consumption, labor supply and investment strategy. We find that deferring the retirement age stimulates
optimal consumption over time and discourages optimal labor supply during the working life. We also find explicitly that optimal
portfolio allocation becomes more ‘conservative’ when the individual approaches his prescribed retirement age. The effects
of risk-aversion coefficients on optimal decisions are examined. |
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Keywords: | |
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