The relevance and the limits of the Arrow-Lind Theorem.

Summary When an investment project yields socio-economic net benefits that are uncertain but independent of the systematic risk of the economy, these benefits should be discounted at the risk free rate if they are disseminated among a large population of stakeholders. This may be the case of a public project whose benefits are distributed within the large population of taxpayers. This is the essence of the Arrow-Lind Theorem, which played a crucial role in the evaluation of public policies around the world since its publication in 1970. Because of the differentiated treatment of investments evaluation that this result supports, it has also been extremely controversial. By reducing the discount rate to evaluate risky projects in the public sphere, it has certainly contributed to the expansion of the public sector in several western countries over the last four decades. We hereafter explain why this has been a mistake due to a fallacious interpretation of the Theorem.