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

Ben-Gad, Michael (), Ben-Haim, Yakov () and Dan Peled ()
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Ben-Gad, Michael: Department of Economics, City University, London, http://www.city.ac.uk/economics/staff/ben-gad/index.html
Ben-Haim, Yakov: Faculty of Mechanical Engineering, Technion-Israel Institute of Technology, http://www.technion.ac.il/yakov/index.html

No 08/05, City University Economics Discussion 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 between competing defense measures. We demonstrate that when determining the level and composition of defense spending in an environment of extreme uncertainty vis-a-vis the likelihood of armed conflict and its outcomes, robust-satisficing expected utility will usually be preferable to expected utility maximization. Moreover, our analysis suggests that in environments with unreliable information about threats to national security and their consequences, a desire for robustness to model misspecification in the decision making process will imply greater expenditure on certain types of defense measures at the expense of others. Our results also provide a positivist explanation of how governments seem to allocate security expenditures in practice.

Keywords: Info-gap; Knightian Uncertainty; Robustness; Defense (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2008-03
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