Job switching and bequest motives in an optimal consumption–investment model under inflation and mortality risks

Abstract

This study presents a unified model for analyzing optimal consumption, investment, and life-insurance decisions under the combined effects of inflation risk, mortality risk, and reversible job-switching opportunities. In the model, individuals dynamically choose between two job states with distinct income–leisure trade-offs while allocating wealth across a complete financial market that includes inflation-linked bonds, stocks, and bank deposits. Using the martingale approach, we derive closed-form solutions and conduct comparative statics to examine how life expectancy, bequest motives, inflation, and leisure preferences jointly influence individual financial decision-making. The results show that mortality risk and bequest motives have opposing effects on the wealth threshold for job switching, offering new theoretical insights beyond prior studies, which typically consider these factors in isolation. Furthermore, we demonstrate that job-switching flexibility can significantly enhance consumption and investment outcomes, especially in inflationary environments. The model is further extended to incorporate stochastic labor income and job-switching costs, capturing more realistic labor market frictions and income uncertainty. Although these extensions do not yield closed-form solutions, the theoretical frameworks provide a foundation for future research using partial differential equation methods. Overall, the proposed framework delivers strong explanatory power and meaningful policy implications for retirement planning, life-insurance design, inflation-hedging strategies, and the development of flexible labor market policies.