The impact of a partial borrowing limit on financial decisions |
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Authors: | Byung Hwa Lim |
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Institution: | Department of Economics and Finance, The University of Suwon, Hwaseong-si, Gyeonggi-do 18323, Republic of Korea |
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Abstract: | We consider a consumption, investment, life insurance, and retirement decision problem in which an economic agent is allowed to borrow against only a part of future income. The closed-form solution is attained by applying a dual approach that directly imposes the conditions for the borrowing limit on a dual value function. We provide analytic comparative statics for optimal strategies with rigorous proofs. It is confirmed that a more stringent borrowing limit leads to less consumption and less life insurance purchase. However, even with a tighter borrowing limit, an agent with weak incentive to retire can invest more when the wealth level is high enough. We also show that a more stringent borrowing limit can delay or hasten the optimal retirement timing depending on the agent's current wealth level. |
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Keywords: | Partial borrowing limit Consumption and investment Life insurance Voluntary retirement Duality approach |
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