Dealing with Uncertainty

Abstract

In this chapter we will see that, when uncertainty arises from lack of information about both the state of the world and the agents’ behavior, a remedy to a lack of experience cannot be bought. We will introduce, then, a more complex trap model assuming that innovation (a way out of the trap) can occur through a process that is unsure and made up of small steps, by way of experiment. Some indications emerge regarding the policy design required to get out of the trap of under-valorized local resources. Intervention should not entail direct public involvement in starting and managing productive activities, nor should it entail providing boundless grants and incentives to private agents. Wage reduction is not a good approach neither. Intervention should be designed with the goal of increasing the difference between the net return of new risky activities and the safe return of traditional ones. The ability to choose the most promising project, however, is not very realistic. The outcome of any new project is uncertain. If this were not the case, there would be no traps to deal with. This leads to the use of cost as a lever rather than selection. Policy makers should provide public goods and services selected from those best able with certainty to reduce costs to those actors who are engaging in new activities.