Consumption satisfaction stock ($d\xi =(c-\lambda \xi )dt$)

A consumption satisfaction stock smooths past consumption by ${\xi }_t=e^{-\lambda t}{\xi }_0+{\int }_0^t{e}^{-\lambda (t-s)}{c}_{s}ds$. Unlike multiplicative habit utility, the running utility function may depend on this stock alone. A unit of present consumption raises future consumption satisfaction while costing one unit of financial portfolio wealth.

In singular stochastic control, an unrestricted consumption rate can approximate instantaneous transfers from portfolio wealth into a consumption satisfaction stock. In the relaxed problem a nondecreasing control $C$ records these transfers. A transfer $\Delta C$ decreases portfolio wealth and increases consumption satisfaction by the same amount. Rate controls need not attain the supremum when the relaxed optimum has a jump.

If consumption contributes $c(V_{\xi }-V_w)$ to the Hamilton-Jacobi-Bellman equation and has no finite upper bound, finite value requires $V_{\xi }\le V_w$. Strict inequality makes zero consumption optimal locally. Equality describes an active transfer boundary, often reached through singular consumption control.

For CRRA utility of a consumption satisfaction stock, jointly scaling initial portfolio wealth, consumption satisfaction and controls gives homogeneity of degree $1-R$. The value function therefore depends on one dimensionless ratio after factoring out ${\xi }^{1-R}$. The effective consumption coefficient becomes ${\xi }^{-R}[(1-R)v-(x+1)v^{\prime }]$.