Allocating Security Expenditures under Knightian Uncertainty: an Info-Gap Approach

Michael Ben-Gad, Y. Ben Haim and D. Peled

Working Papers from Department of Economics, City University London

Abstract: We apply the information gap approach to resource allocation under Knightian (non-probabilistic) uncertainty in order to study how best to allocate public resources betweencompeting defense measures. We demonstrate that when determining the level and composi-tion of defense spending in an environment of extreme uncertaintyvis-a-visthe likelihood ofarmed conflict and its outcomes, robust-satisficing expected utility will usually be preferableto expected utility maximisation. Moreover, our analysis suggests that in environments withunreliable information about threats to national security and their consequences, a desirefor robustness to model misspecification in the decision making process will imply greaterexpenditure on certain types of defense measures at the expense of others. Our results alsoprovide a positivist explanation of how governments seem to allocate security expendituresin practice.

Keywords: Defense; Knightian Uncertainty; Robustness; Info-gap (search for similar items in EconPapers)
Date: 2019-04-18
New Economics Papers: this item is included in nep-upt
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Journal Article: Allocating Security Expenditures under Knightian Uncertainty: An Info-Gap Approach (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cty:dpaper:19/06

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