An Economic Perspective on Terrorism and Counterterrorism

This occasional-series paper offers an economic perspective on the study of terrorism and counterterrorism. At the outset, the paper identifies how the economic perspective enriches terrorism analysis by stressing rational choice of myriad agents (e.g., the terrorist groups, their supporters, and targeted governments) subject to constraints. Game-theoretic strategic rational choice allows allied and adversarial agents to incorporate the responses of others into their interdependent choices. Economists' theoretical paradigms are judged by their success in predicting agents' behavior and informing effective policies. Since 9/11, many political scientists, operation researchers, sociologists, and others applied economic methods to their study of terrorism. To illustrate selected applications of the economic approach, the paper considers findings from economic studies on bargaining and making concessions during hostage incidents, judging the effectiveness of counterterrorism strategies, identifying the economic consequences of terrorism, and finding adequate identification strategies in empirical studies. Future directions and some shortcomings of the economic approach complete the study.