THE ECONOMICS OF TERRORISM: A (SIMPLE) TAXONOMY OF THE LITERATURE

Abstract

We draw on existing surveys on the economics of terrorism, classifying the contributions to the field by theme, main approach and methodology. Research articles are divided into the themes: Definition and measurement of terrorist activities; Nature of terrorists; Utility cost of terrorism; Impact of terrorism on aggregate output; Terrorism and specific sectors of activity; Terrorism and economic policy; and Counter‐terrorist policies. For the set of papers examined, as well as for each theme, we divide the papers by main approach – macroeconomic/microeconomic – and methodology – theoretical/empirical. We find wide variation in approach/methodology across research themes, suggesting extensive research opportunities.

Keywords:

• Terrorism
• Microeconomics
• Macroeconomics
• Theory
• Empirics

JEL Codes:

• A12
• F52
• H56

ACKNOWLEDGMENTS

The authors have benefited from the comments of Tilman Bruck and two anonymous referees. They thank the Fundação para a Ciência e Tecnologia and NOVA Forum for financial support, and Ana Gracias Duarte for excellent research assistance. Fernanda Llussá: Faculdade de Ciências e Tecnologia, Universidade Nova de Lisboa, Campus da Caparica., 2829‐516, Portugal. José Tavares: Faculdade de Economia e Gestão, Universidade Nova de Lisboa, Campus de Campolide, 1099‐032, Lisboa, Portugal.

Notes

¹ In this essay we concentrate on the literature of the past two decades, which has brought attention to the causes and consequences of terrorism, part of the broader area of the economics of conflict.

² For surveys on economics and terrorism see Laitin and Shapiro (2008) on the motivations and organization of terrorists, Frey et al. (2007) on the costs of terrorism, Brück and Wickström (2004), Enders and Sandler (2009) on the consequences of terrorism, Drakos (2009) on the data availability and needs, and Brück et al. (2004) and Llussá and Tavares (2008) on the different themes and the research agenda. Llussá and Tavares (2007) provide a first ‘graphical’ presentation of the distribution of papers on the economics of terrorism by approach and methodology. Brück and Wickström (2004), Enders and Sandler (2006), and Keefer and Loayza (2008) are important comprehensive volumes. See also the books by Frey (2004) and Brück (2006).

³ As highlighted in Drakos (2009).

⁴ See Harris (2005) and Bergesen and Lizardo (2004) for a discussion of the definitions of terrorism.

⁵ The official definition by the United States Department of State sees terrorism as ‘premeditated, politically motivated violence perpetrated against noncombatant targets by sub‐national groups or clandestine agents, usually intended to influence an audience’. See Office of the Coordinator for Counterterrorism (1997). Mickolus (1980: xiii), sees terrorism as ‘the use, or threat of use, of anxiety‐inducing extra‐normal violence for political purposes […] when such action is intended to influence the attitudes and behavior of a target group wider than the immediate victims.’

⁶ Thus, any given paper appears as contributing to at least one topic area, although often it will appear under more than one topic.

⁷ Papers classified as empirical in focus use at least an intelligent interpretation of the data. Some of the papers classified as theoretical consist in an informal discussion of conceptual mechanisms.

⁸ Of course some papers rely on both theory and empirics and others, less frequently, may be seen as combining micro and macroeconomic approaches. But, although subjective, the classification of most papers is relatively straightforward. Two frequent examples are papers dealing with macro issues from an empirical perspective by providing estimates of the impact of terrorism on aggregate output; a typical micro theoretical paper models the individual incentives to participate in terrorist activities.

⁹ Each of the papers examined are explicitly mentioned in the Appendix, together with the individual classification adopted.

¹⁰ We have selected among the three top cited papers according to Google Scholar, as a measure of impact.

¹¹ See Frey et al. (2007) for a survey of articles on this issue.

¹² This seems in contradiction with the literature on the nature of terrorists, as exemplified in Krueger and Maleckova (2003) – discussed above. Especially as there is evidence that economic agents – the electorate, in particular – understand the complexity of the responses to terrorism and are receptive to more nuanced and flexible policy responses, as Shambaugh and Josiger (2004) have shown in the case of hostage taking.

¹³ Articles such as Frey (2004) discuss the ‘carrot’ versus ‘stick’ option, and clamor for empirical validation through creative work.