Time-Consistent Investment and Consumption Strategies under a General Discount Function

Abstract

In the present paper, we investigate the Merton portfolio management problem in the context of non-exponential discounting, a context that gives rise to time-inconsistency of the decision-maker. We consider equilibrium policies within the class of open-loop controls that are characterized, in our context, by means of a variational method which leads to a stochastic system that consists of a flow of forward-backward stochastic differential equations and an equilibrium condition. An explicit representation of the equilibrium policies is provided for the special cases of power, logarithmic and exponential utility functions.