The impact of terrorism on inbound tourism: disentangling the cross-spatial correlation

There is growing evidence that the recent wave of terrorism is underpinned by a common factor. This is illustrated by the heightened cross-country correlation of terrorist attacks. This has been largely ignored in the literature assessing the effect of terrorism in destination countries on inbound tourism: the standard approaches typically abstract from the possible impact of terrorism elsewhere on tourist arrivals in a given destination. We cast a gravity model into the common factor setting in the context of 35 OECD countries during 1995-2015 and show that the common approaches underestimate the repercussion of terrorist incidents on tourist inflows. We use the common correlated effects estimator to correct for the bias. Our results highlight the need for acknowledging the cross-section correlation in terrorism and using appropriate estimation strategies whenever the economic incidence of terrorism is examined.