March 2021 Working Paper 003.2021

The Arrow-Lind fallacy also prevailed in the debate about public spending in the wake of the financial crisis of 2008 or of the COVID-19 crisis of 2020 when many experts recommended using the low cost of public capital to implement ambitious recovery plans in the United States and in Europe.2 The absence of consensus on the Social Cost of Carbon (SCC) in our profession illus- trates the mess in wh. [...] The smooth curve describes the density function of the distribution of the CCAPM betas of the implemented project predicted by the model. [...] The dashed curve is the density function N(µβ, σ2β) of the betas of the projects in the opportunity set. [...] Contrary to the previous section, the fact that all agents follow the same inefficient investment strategy means that the dynamics of growth and thus the equilibrium asset prices are affected by the irrationality of the agents. [...] Of course, the WACC equilibrium is dominated by the rational equilibrium, but if all agents in the economy apply the same single discount rate rule, using the equilibrium WACC 16 as the all-purpose discount rate is the rule that maximizes intertemporal welfare in the set of single-discount-rate allocations.