WP 6.2 Economic analysis of income risks under Knightian uncertainty
Classical economic analysis of situations in which a decision maker has to take decisions over acts that have multiple possible outcomes usually treats uncertainty by employing expected utility theory. Yet the knowledge that the decision maker has available about the known possible future states of the world may not be sufficient to justify a probabilistic approach. This subpart of work package 6 is thus concerned with developing concepts and tools for economic risk valuation under Knightian uncertainty (after Frank Knight’s distinction between ‘risk’ and ‘uncertainty’ from 1930), i.e. in situations in which the probabilities of the various outcomes are unknown. The methods developed will be applied to the scenarios studied within the overall project.