Smooth Value Functions for a Class of Nonsmooth Utility Maximization Problems

In this paper we prove that there exists a smooth classical solution to the HJB equation for a large class of constrained problems with utility functions that are not necessarily differentiable or strictly concave. The value function is smooth if the optimal control satisfies an exponential moment condition or if the value function is continuous on the closure of its domain. The key idea is to work on the dual control problem and the dual HJB equation. We construct a smooth, strictly convex solution to the dual HJB equation and show that its conjugate function is a smooth, strictly concave solution to the primal HJB equation satisfying the terminal and boundary conditions.