ABSTRACT
In their seminal paper of 1970, Kenneth Arrow and Robert Lind investigated how governments should treat uncertainty in the evaluation of public investment decisions. Their main argument was that if risks associated with a public investment are publicly borne (e.g., through taxation), the total cost of risk bearing is insignificant. Besides the risk spreading ability, they also argued that, as governments are able to pool a large number of assets, their risk portfolio is highly diversified. Consequently, Arrow and Lind (AL) suggested that governments can behave risk neutrally and evaluate their investments only through the expected net present (social) value.
