The uncertain foundations of the welfare state

The welfare state is often portrayed as provider of insurance against ‘uncertainties’, in Knight's (1921) sense of the term, which would be refused or underinsured on private markets. This image conflicts with the standard economic model of risk exchange founded on the subjective interpretation of probability, which predicts that all individual uncertainties will be insured by private markets. Our aim in this paper is to explain why this prediction fails and, building on contributions to decision theory that take seriously the idea of Knightian uncertainty, to show why social insurance may be justified.