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.