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Gollier, Christian
(2024)
The welfare cost of ignoring the beta.
Journal of Political Economy Microeconomics.
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Abstract
Because of risk aversion, any sensible investment valuation system should value less projects that contribute more to the aggregate risk. In theory, this is done by adjusting discount rates to consumption betas. But in reality, most public institutions use a dis-count rate that is rather insensitive to the risk profile of their investment projects. The economic consequences of the implied misallocation of capital are severe. I calibrate a Lucas model in which the investment opportunity set contains a constellation of projects with different expected returns and risk profiles. The model matches the traditional finan-cial and macro moments, together with the observed heterogeneity of assets’ risk profiles. The welfare loss of using a single discount rate is equivalent to a permanent reduction in consumption that lies somewhere between 15% and 45% depending upon which single discount rate is used.
| Item Type: | Article |
|---|---|
| Language: | English |
| Date: | December 2024 |
| Refereed: | Yes |
| Uncontrolled Keywords: | Discounting, investment theory, asset pricing, carbon pricing, Arrow-Lind theorem, WACC fallacy, rare disasters, capital budgeting |
| JEL Classification: | G12 - Asset Pricing; Trading volume; Bond Interest Rates H43 - Project Evaluation; Social Discount Rate Q54 - Climate; Natural Disasters |
| Subjects: | B- ECONOMIE ET FINANCE |
| Divisions: | TSE-R (Toulouse) |
| Site: | UT1 |
| Date Deposited: | 07 Mar 2025 09:18 |
| Last Modified: | 07 Mar 2025 09:20 |
| OAI Identifier: | oai:tse-fr.eu:130407 |
| URI: | https://publications.ut-capitole.fr/id/eprint/50588 |
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The welfare cost of ignoring the beta. (deposited 19 Aug 2024 07:08)
- The welfare cost of ignoring the beta. (deposited 07 Mar 2025 09:18) [Currently Displayed]
