An Economic Perspective On Transnational Terrorism

This paper indicates how economic analysis can be applied for enlightened policy making with respect to transnational terrorism. Both theoretical tools -- e.g., game theory and utilitymaximizing models -- and empirical techniques -- e.g., time series and spectral analysis -- are used to put modern-day terrorism into perspective and to suggest policy responses. From hostage negotiations to the installation of technological barriers (e.g., metal detectors, embassy fortification), economic methods can provide policy insights. Transnational terrorism and efforts to address it involve transnational externalities and market failures. Strategic interactions abound in the study of transnational terrorism. JEL classification: D74, H56 Keywords: Transnational terrorism, noncooperative game theory, spectral analysis, vector autoregression analysis On 11 September 2001, the world watched aghast as two commercial airliners toppled the twin towers of the World Trade Center and a third airliner plowed into the Pentagon. Yet a fourth hijacked plane landed short of its intended Washington, DC target as passengers took matters into their own hands. Economic methods -- both theoretical and empirical -- have been applied by a small group of economists to understand a host of issues associated with such terrorist events. These issues concern the policy effectiveness of alternative responses (e.g., toughening punishments, retaliatory raids, installing technological barriers), negotiation responses in hostage incidents, the terrorists' choice of target, the economic impacts of terrorism, and others. Terrorism is the premeditated use, or threat of use, of extranormal violence to obtain a political objective through intimidation or fear directed at a large audience. An essential aspect of this ..