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.

Publication Type:	Monograph (Discussion Paper)
Publisher Keywords:	Defense; Knightian Uncertainty; Robustness; Info-gap
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs > Economics School of Policy & Global Affairs > Economics > Discussion Paper Series

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