The Welfare Cost of Ignoring the Beta

Christian Gollier

Journal of Political Economy Microeconomics, 2026, vol. 4, issue 1, 147 - 172

Abstract: Because of risk aversion, any sensible investment valuation system should value less projects that contribute more to aggregate risk. But most public institutions use a discount rate that is insensitive to the risk profile of their investment projects. To measure the welfare loss of this rule, I calibrate a Lucas model that matches the traditional financial 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 on which single discount rate is used.

Date: 2026
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