DUSENBERRYS RATCHETING OF CONSUMPTION - OPTIMAL DYNAMIC CONSUMPTION AND INVESTMENT GIVEN INTOLERANCE FOR ANY DECLINE IN STANDARD-OF-LIVING

Duesenberry's ratcheting consumption demand is derived as a feature of the optimal dynamic consumption and investment policy given extreme h abit formation that prevents consumption from falling over time. Prefe rences are in effect non-time-separable extended-real-valued von Neuma nn-Morgenstern preferences. Consumption increases each time wealth rea ches a new maximum. Risky investment is proportional to the excess of wealth over the perpetuity value of current consumption. Extensions co nstrain the net rate of decrease in consumption with a constant other than zero, add more consumption goods, and constrain on the maximal ho lding of the risky asset as a proportion of wealth. These strategies m ay be useful for the management of university endowments, participator y investment accounts, and risky arbitrage funds.