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

Ben-Gad, M. ORCID: 0000-0001-8641-4199, Ben-Haim, Y. and Peled, D. (2019). Allocating Security Expenditures under Knightian Uncertainty: an Info-Gap Approach. Defence and Peace Economics,

Abstract

We apply the information gap approach to resource allocation under Knightian (nonprobabilistic) 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 maximisation. 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.

Publication Type: Article
Additional Information: This is an Accepted Manuscript of an article to be published by Taylor & Francis in Defence and Peace Economics, to be available online: http://www.tandfonline.com/toc/gdpe20/current
Publisher Keywords: Defense; Knightian Uncertainty; Robustness; Info-gap
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
J Political Science > JF Political institutions (General)
U Military Science
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/22252
[img] Text - Accepted Version
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