ABSTRACT
Arrow and Lind convincingly argue that the dissemination of risk and the risk sharing are not efficiently organized by financial markets, so that their result cannot be applied to the private sector. Some insurance markets are missing, whereas others are plagued with adverse selection and moral hazard problems. This implies that the CCAPM formula (2), which relies on efficient risk sharing in the economy, can only be interpreted as a rule-ofthumb for the evaluation of private projects. Investors and firms should take into account the fact that some of the risks generated by the project are retained by a limited number of stakeholders, which implies a positive collective cost of risk even when it has a zero beta. But it should also be noticed that the public sector also face frictions and inefficiencies from the same diseases. Various principal-agent problems force States to limit the dissemination of risk in the economy, as shown for example by Laffont and Tirole (1993). The goals of public servants are rarely aligned with the general interest, so that some risky rent should be allocated to them in order to provide better incentives. There is no reason a priori to believe that the public sector is more efficient than the private sector to disseminate risk in the population. In fact, there are some reasons to believe that the opposite is true. For example, financial markets are in a better position than states to disseminate country-specific risks around the planet.
