Levon Goukasian, Pepperdine University

(joint work with J. Cvitanic of Caltech and F. Zapatero of USC)

We study the portfolio selection problem in the presence of the option to exert costly effort for more income. As expected, investors who have the flexibility to generate future income are willing to take more risk. Additionally, we find that portfolio allocation is not monotonically increasing with time. We also study the dependence of the portfolio allocation on other parameters like interest rate, market price of risk, individual's productivity and employment constraints.