This paper examines the possibility of providing a rigorous theoretical foundation to the piggy-bank function of the welfare state, by considering a recent contribution in the modern decision theory under uncertainty, namely, the knightian decision theory proposed by Bewley (1986). In giving formal expression to Knight’s ideas, by dropping the completeness assumption of the bayesian model and adding an assumption of
inertia, this theory explains the absence of betting and insurance without reference to asymmetric information. In this paper, it shall be argued that by explaining why it is difficult to insure uncertain gambles, this theory is also capable of shedding new light on the relevance of public insurance. Despite its name, knightian decision theory bears certain resemblances to Keynes’s ideas rather than Knight’s. In this respect, it seems more appropriate to refer to this theory as pseudo-knightian decision theory.