The welfare cost of ignoring the beta

Christian Gollier


Modern investment theory recommends the use of project-specific risk-adjusted discount rates for investment and policy evaluations. Financial markets tell us that these risk adjustments have been large over the last century. But in reality, many public and private institutions and people use a discount rate that is not sensitive to the risk profile of their investment projects. This maybe due to limited financial literacy, to the continued misuse of the Arrow-Lind theorem or to the WACC fallacy. I show in this paper that the economic consequences of the implied misallocation of capital is catastrophic for the economy. 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 discount rate is used. This suggests in particular that governments should reform their discounting system for policy and investment evaluation to align it with what asset pricing theory has been advocating for half a century now.


Discounting; investment theory; asset pricing; carbon pricing; Arrow-Lind theorem; WACC fallacy; capital budgeting.;

Codes JEL

  • G12: Asset Pricing • Trading Volume • Bond Interest Rates
  • H43: Project Evaluation • Social Discount Rate
  • Q54: Climate • Natural Disasters • Global Warming


Christian Gollier, The welfare cost of ignoring the beta, janvier 2021.

Voir aussi

Publié dans

janvier 2021