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

Abstract

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 defence measures. We demonstrate that when determining the level and composition of defence 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 defence measures at the expense of others. Our results also provide a positivist explanation of how governments seem to allocate security expenditures in practice.