ABSTRACT
Although, Arrow and Lind recognize in their paper that their result holds technically only for idiosyncratic risks, they support the idea that it has a much broader domain of applications. They first claim that ‘the government undertakes a wide range of public investments and it appears reasonable to assume that their returns are independent’. In other words, they suggest that the average project in the economy should have a zero beta. This cannot be true. Because the economy can be represented as a portfolio of projects, the mean beta should be 1, and there is no reason to believe that the public sector has a portfolio of projects whose betas are systematically downward biased. Quite to the contrary, many public projects have large betas. Let me illustrate this with two examples. The infrastructure of highways is often justified on the basis of the time gained by their users, and by the number of lives saved. But the elasticity of the value of time and of the value of life with respect to changes in GDP are often assumed to be large. This implies a large beta for highway projects. In the case of the construction of a new high voltage line of electricity transportation justified by the anticipated increase in demand for electricity in a specific isolated region, the value of the project is positive only if the regional economy will indeed be growing in the future. This also yields a large beta. The same argument applies for fast train lines.
