2025/02/19 by Thijs Kamma, Kamma, Thijs, Antoon Pelsser +1
Computer Science · #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Optimization and Variational Analysis
paper · pdf · doi:10.48550/arxiv.2502.13678
openalex publication_date 2025/02/19 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper provides a dual formulation of the optimal consumption problem with internal multiplicative habit formation. In this problem, the agent derives utility from the ratio of consumption to the internal habit component. Due to this multiplicative specification of the habit model, the optimal consumption problem is not strictly concave and incorporates irremovable path-dependency. As a consequence, standard Lagrangian techniques fail to supply a candidate for the corresponding dual formulation. Using Fenchel's Duality Theorem, we manage to identify a candidate formulation and prove that it satisfies strong duality. On the basis of this strong duality result, we are able to derive duality relations that stipulate how the optimal primal controls depend on the optimal dual controls and vice versa. Moreover, using the dual formulation, we develop an analytical evaluation mechanism to bound the accuracy of approximations to the optimal solutions.