| Description |
1 online resource (23 pages) : illustrations |
| Series |
Discussion paper series, 0265-8003 ; no. 16007 Public economics Climate change RPN |
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Discussion paper (Centre for Economic Policy Research (Great Britain)) ; no. 16007.
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| Summary |
Because of risk aversion, any sensible investment valuation system should value less projects that contribute more to the aggregate risk, i.e., that have a larger income-elasticity of net benefits. In theory, this is done by adjusting discount rates to consumption betas. But in reality, for various reasons (Arrow-Lind and WACC fallacies, market failures), most public and private institutions and people use a discount rate that is rather insensitive to the risk profile of their investment projects. I show in this paper that the economic consequences of the implied misallocation of capital are dire. To do this, I calibrate a Lucas model in which the investment opportunity set contains a myriad of projects with different expected returns and 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 familiar discounting system is used. Economists should devote more energy to support a reform of public discounting systems in favor of what has been advocated by the normative interpretation of modern asset pricing theories over the last four decades |
| Notes |
"Published 04 April 2021" |
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"Submitted 29 March 2021" |
| Bibliography |
Includes bibliographical references (pages 19-21) |
| Notes |
Description based on online resource; title from http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=16007 viewed April 5, 2021 |
| Subject |
Assets (Accounting) -- Prices -- Economic aspects
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Discount -- Economic aspects
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Greenhouse gas mitigation -- Economic aspects
|
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Environmental economics.
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Environmental economics.
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| Form |
Electronic book
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| Author |
Centre for Economic Policy Research (Great Britain), publisher.
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