ABSTRACT
Arrow and Lind’s (1970) theorem postulates that ‘when the risks associated with a public investment are publicly borne, the total cost of risk-bearing is insignificant and, therefore, the government should ignore uncertainty in evaluating public investments. Similarly the choice of the rate of discount should in this case be independent of considerations of risk’ (p. 366). The theorem holds regardless whether security markets are complete, for any public project that is: (1) statistically independent of individual income, (2) measured according to an objective probability distribution, (3) evaluated considering individual costs and benefits represented by von Neumann-Morgestern, state-independent utilities; moreover, it holds provided (4) the government spreads the project risks among a large population of people.
