Economics, Game Theory and Terrorism (Walter Enders, Todd Sandler)

PATTERNS OF TRANSNATIONAL TERRORISM, 1970-99:
ALTERNATIVE TIME SERIES ESTIMATES
by
Walter Enders*
Department of Economics, Finance, and Legal Studies
University of Alabama
Tuscaloosa, AL 35487
and
Todd Sandler
School of International Relations
University of Southern California
Von Kleinsmid Center 330
Los Angeles, CA 90089-0043
Revised: October 2001
e-mail of corresponding author: tsandler@usc.edu
Authors' Note: Enders is the Lee Bidgood Chair of Economics and Finance, while Sandler is the
Robert R. and Katheryn A. Dockson Professor of International Relations and Economics.
Sandler is a member of the School of International Relations and the Department of Economics.
We have profited from comments from three anonymous referees and from Patrick James.

Abstract
Using alternative time series methods, this paper investigates the patterns of transnational
terrorist incidents that involve one or more deaths. Initially, an updated analysis of these fatal
events for 1970-99 is presented using a standard linear model with pre-specified interventions
that represent significant policy and political impacts. Next, a (regime-switching) threshold
autoregressive (TAR) model is applied to this fatality time series. TAR estimates indicate that
increases above the mean are not sustainable during high-activity eras, but are sustainable during
low-activity eras. The TAR model provides a better fit than previously tried methods for the
fatality time series. By applying a Fourier approximation to the nonlinear estimates, we get
improved results. The findings in this study and those in our earlier studies are then applied to
suggest some policy implications in light of the tragic attacks on the World Trade Center and the
Pentagon on 11 September 2001.

On the morning of 11 September 2001, the world watched in horror as 19 hijackers

wreaked death and destruction on the World Trade Center and the Pentagon. The lethality of
transnational terrorism attained a new height, greatly out of line with the experience of the last
three decades where on average 400-500 people lost their lives each year in transnational
terrorist events (US Department of State, 1989-2000). In a matter of an hour, somewhere
between 5000 to 6000 innocent individuals from upwards of 62 nations died in four coordinated
hijackings. This attack underscores that the security threat confronting industrial nations is more
from clandestine groups with perceived grievances than from rogue nations. The reliance of
modern industrialized economies on technology makes them especially vulnerable to terrorist
attacks, as the events of 11 September 2001 sadly demonstrate.
Terrorism is the premeditated use or threat of use of extra-normal violence or brutality by
subnational groups to obtain a political, religious, or ideological objective through intimidation
of a huge audience, usually not directly involved with the policymaking that the terrorists seek to
influence.1 Key ingredients of the definition include the underlying political motive, the general
atmosphere of intimidation, and the targeting of those outside of the decision-making process.
Terrorists choose their targets to appear to be random so that everyone feels at risk, when getting
on a plane, entering a federal building, or strolling a market square. Business people, military
personnel, tourists, and everyday citizens, rather than politicians, are generally the targets of
terrorists attacks. In the case of the World Trade Center, the victims were not directly involved
in the political decision-making process associated with the demand (i.e., the removal of the US
presence from Saudi Arabia and an end to US support of Israel) that may have been behind the
attacks.2 The incident underscores the importance of applying sophisticated analyses to the study
2
of international terrorism to better understand its patterns, in the hopes of deriving improved
policies and predictions to protect against future attacks.
Although terrorism has plagued civilization from its inception, there has been a
heightened awareness since the end of 1967 Arab-Israeli War and the start of Israeli occupation
of captured territory, at which point terrorism assumed a greater transnational character.
Whenever a terrorist incident (e.g., a bombing, plane hijacking, and assassination) in one country
involves victims, targets, or institutions of at least one other country, the incident is transnational.
Incidents to protest the Israeli occupation resulted in the hijacking of planes on international
flights, the murder of Israeli athletes at the 1972 Munich Olympics, and attacks throughout
Western Europe, and represented instances of transnational terrorism. Given the perpetrators'
citizenship and the multiple nationalities of the victims, the four simultaneous hijackings on 11
September 2001 were transnational terrorist acts. The ability of terrorist events to capture
headlines demonstrates the consequences of such tactics to others, who later adopt them for their
causes. Terrorism is particularly troublesome for liberal democracies, entrusted with protecting
the lives and property of their electorate.3 If such democracies respond inappropriately to a
terrorist threat by either caving in to terrorist demands or overly restricting freedoms, then they
can lose legitimacy and be defeated at the next election (Wilkinson, 1986, 2001).
With the availability of sufficiently long time series, economists and others have applied
time-series techniques to evaluate anti-terrorism policy effectiveness, to uncover trends and
cycles, and to estimate the effects of terrorist activities. A host of policy decisions have been
examined, including the usefulness of retaliatory raids (Brophy-Baermann and Conybeare, 1994;
Enders and Sandler, 1993), the consequences of UN conventions and resolutions on terrorist
activities (Enders, Sandler, and Cauley, 1990), and the impact of media reporting on future
events (Nelson and Scott, 1992; Scott, 2001). Past studies have decomposed the series of all
3
terrorist events into its component series (e.g., assassinations, threats and hoaxes, hostage-taking
events, and bombings) so as to identify any trend or cycles.4 In so doing, it was shown that the
time series for each attack mode displays its own cycle, whose length increases with the
logistical complexity of the action. Apparently, the attack-counterattack interaction between the
terrorists and the authorities give rise to cycles that take longer to play out for more complicated
operations such as skyjackings (Enders et al., 1992). In terms of the estimated effects of
terrorism, studies have examined the relationship of terrorism and tourism as well as that
between terrorism and foreign direct investment.5
When incidents involving casualties (i.e., deaths, injuries, or both) are distinguished from
those with no casualties, there is a striking difference between the two. Namely, casualties series
display more predictability than noncasualties series, which are largely random noise once
detrended (Enders and Sandler, 2000). Thus, estimates and policy evaluation should be based on
a casualty series such as DEATH, where one or more deaths among terrorists or victims
resulted from the action, owing to this series deterministic factors. This finding suggests that
more intense terrorist events are more predictable than those with less consequence such as
threats, hoaxes, letter bombings, and other small-scale bombings.
This paper carries on the process of improving policy evaluations and estimates of the
patterns of transnational terrorism. At first, time-series-based policy evaluation relied on
intervention analysis, in which dummy variables identifying suspected impact points are tested
for significance for a single series (Cauley and Im, 1988; Enders et al., 1990). This intervention
procedure was later extended to vector-autoregressive (VAR) analysis to capture the
interrelationship among two or more series (Enders and Sandler, 1991, 1993, 1996; Nelson and
Scott, 1992), so that the introduction of, say, metal detectors in airports may curtail skyjackings
but augment hostage-taking events (e.g., kidnappings), not protected by these detectors, as
4
terrorists substitute among modes of attacks in response to policy-induced changes in relative
costs. These VAR studies, like their single-series predecessors, assumed linear representations
with no regime-switching possibilities. Hence, the current exercise represents an important
departure where nonlinear techniques are also applied to the DEATH series, which displays the
greatest deterministic factors. These techniques not only allow the mean of the DEATH series to
differ according to the overall intensity of activities, but they also permit the data to indicate
points at which things become different.
In the next section, we present the terrorists' choice-theoretical model that underlies some
of the empirical findings. This is followed by some important intervention points and a
description of the data. The ensuing section distinguishes the dummy-variable intervention
analysis from the nonlinear threshold model. Next, the regime-switching model is introduced,
followed by the actual estimations. The Fourier-approximation model is estimated in the next
section. The next-to-last section addresses the implications of this article and our prior work on
the aftermath of the attacks on the World Trade Center and the Pentagon. Concluding remarks
are then given.
THEORETICAL MODEL
Our application is to transnational terrorism which has become much more prevalent
during the last thirty years as terrorists have taken advantage of improvements in
communication, transportation, and technology to intimidate a global community with threats of
violence unless their political demands are met. Transnational terrorist incidents are examples of
transboundary externalities, because actions by terrorists or reactions by governments in one
country may impose uncompensated costs or benefits on the people or property of another
5
country.6 Thus, a government plagued with terrorism on its soil may spend too much on
deterrence in an effort to transfer the attack elsewhere, or else a terrorist group may achieve
maximum news coverage by staging their attack in a European capital. When an incident is
planned in one country, but executed in another, it is a transnational event. The kidnapping or
assassination of a citizen from another country in a host country is a transnational terrorist act, as
is a bombing directed at one or more foreign citizens. A skyjacking of a flight that originates in
country A, but that ends in country B, is transnational. If, however, the targeted flight has
passengers from two or more countries, the skyjacking is transnational even if it never takes off.
We focus on transnational terrorism not only because of its importance to international studies,
but also because of the availability of a long consistently coded time series. Moreover,
transnational terrorism poses an important threat to the stability of the global community. The
events of 11 September have not only disrupted air travel, but may have pushed the global
economy, already on the brink, into recession. By increasing cross-border interactions,
globalization can augment the ramifications of catastrophic transnational terrorist events.
Like any agent, terrorists' resources in any period are limited and constrain their actions
to pursue satisfaction derived from a political cause. Because our focus is on the entire series of
terrorist events, terrorists are depicted as allocating their resources between terrorist events (t)
and legal actions (VRDVWRPD[LPL]HWKHLUH[SHFWHGXWLOLW\>E(U)]. Terrorist events includes
bombings, skyjackings, assassinations, and other actions, while legal activities include
propaganda statements and gaining a foothold within a base country or countries of operation. A
terrorist group is viewed as allocating scarce resources, R, between legal activities with a certain
gain, gZ, and terrorist activities with an uncertain gain, gt. A terrorist incident may end in at least
two states: success where the incident is completed as planned, or failure where the incident is
either not completed or fails in its goal. Success is a ranGRPYDULDEOHZKRVHSUREDELOLW\LV,I
6
only two states of the world are permitted for terrorist events, then (1 GHQRWHVWKHSUREDELOLW\
of failure. A terrorist group's expected utility is
E (U ) = U (W S ) + (1 )U (W F ),
(1)
where U(W) is the standard von Neumann-Morgenstern utility function. Arguments WS and WF
are the net wealth equivalent measures over the two states of success, S, and failure, F. These
measures equal:
W S = w + g ( R ) + g t ( Rt , e1 ) ,
(2)
W F = w + g ( R ) f ( Rt , e2 ) .
(3)
In equation (2), the net wealth derived from a successful terrorist incident includes the group's
current assets net of current earnings, w, the monetary equivalent net gains from legal activities,
and the monetary equivalent net gains from the terrorist act. RZ represents the resources assigned
to legal actions, and Rt indicates the resources assigned to terrorism actions. In either state of the
world, monetary gains depend directly on the resources (including time) allocated by the
terrorists to either legal activities or the terror campaign, and these gains are assumed to display
diminishing returns.7 In equation (2), e1 represents the environmental factor that also helps
determine gain during a successful outcome. For example, e1 can reflect actions taken by the
authorities (e.g., freezing assets, retaliatory raids, freedom of press) that influence the benefits of
a terrorist success. As such, e1 denotes a shift parameter.
In equation (3), the net wealth for a terrorist failure includes a group's current assets plus
its net gain from legal activities minus the monetary value of the fine or penalty, f, from failure.
If the group fails but escapes, then this penalty includes wasted resources expended on the
unsuccessful event. When, however, the group is captured, the fine refers to the wasted
resources (including murdered terrorists), the opportunity costs of incarceration, and any
monetary penalties assessed. The loss of one or more terrorists results in the costs of training
7
replacements. In f(), e2 denotes an environmental factor that influences the level of losses
during failed campaigns. This factor includes activities taken by authorities, such as the severity
of sentences and extradition requests. Once again, e2 represents a shift parameter of the model.
The terrorist group's resource constraint,
R = Rt + RZ,
(4)
closes the model and indicates that the group's total resources, R, are divided each period
between legal and terrorist activities. Expected utility in equation (1) can be rewritten in terms
of the choice variables (RZ, Rt) and the exogenous shift parameters by substituting equations (2)(4) into (1). Both the optimal levels of RZ and Rt are then determined by maximizing the
resulting expression for expected utility. The likely effects of government policy decisions
UHVXOWLQJIURPFKDQJHVLQe1, and e2 are found through comparative-static analysis, where the
assumption of the model are used to determine the influence that changes in these policy
parameters have on the optimal choice of RZ and Rt. Often, additional assumptions concerning
the terrorist group's risk attitudes can help sign these comparative-static impacts.
Some results are fairly clear-cut without further mathematical analysis. Actions by the
authorities to decrease the terrorists' total resources through raids on their camps, infiltration of
the group, or by freezing their assets will curtail both legal and terrorist activities. If a retaliatory
raid were to increase the terrorists' perceived gains from terrorist attacks as means of protest,8
then the terrorists will shift resources out of legal activities into terrorist acts. During periods of
high terrorist activities, this ability to sustain even a greater level of terrorist acts is limited in
contrast to periods of low activities.
Thus far, we represent the problem as the choice-theoretic decision of a single terrorist
group. From the early 1970s, terrorist groups, engaged in transnational acts, have been tied
either explicitly or implicitly in networks consisting of left-wing terrorist groups (Alexander and
8
Pluchinsky, 1992) united in their goal to overthrow democratic governments, Palestinian groups
united in their aim to establish a homeland or to destroy Israel, and fundamentalist terrorist
groups (Hoffman, 1998; US Department of State, 2001) united in their goal to create nations
founded on fundamentalist principles. Since the start of 1980, the number of religious-based
groups has increased as a proportion of the active terrorist groups: 11 of 48 groups in 1992, 16
of 49 groups in 1994, and 25 of 58 groups in 1995 (Hoffman, 1997:3). Bin Laden's al-Qaida
network includes Islamic extremist organizations in many countries, which are linked through
finances, training, and a common enemy. This network includes such groups as Abu Sayyaf (the
Philippines), Egypt's Islamic Group, Harakat ul-Mujahidin (Pakistan), Islamic Movement of
Uzbekistan, Al-Jihan (Egypt), and Bin Laden's own group (Afghanistan) (US Department of
State, 2001). Even left-wing groups and Palestinian groups have been known to train together
and to have other ties (Wilkinson, 1986, 2001; Hoffman, 1998), so that separate networks have
explicit links to one another. Implicit ties come from copying each other's tactics the so-called
demonstration effect. These networks' common hatred of the United States and Israel means that
heightened attacks by groups in one part of the world can spark increased attacks in other parts
of the world. This implicit coordination shows up as distinct cycles of peaks and troughs in
transnational terrorist activities (Enders et al., 1992; Enders and Sandler, 1999).
Thus far, we have only considered the terrorist choice between legal and terrorist
activities. Another choice by the terrorists must, however, be made in allocating Rt among
alternative modes of attacks so as to equate the expected marginal gain per dollar spent on
alternative operations. Actions by the government to increase the difficulty (i.e., the price) of
one kind of attack will cause the terrorists to substitute into other types of attacks that now
appear to be relatively cheaper (Sandler, Tschirhart, and Cauley, 1983; Enders and Sandler,
1993). Thus, it is essential for authorities to impose policies that cause the terrorists to substitute
9
into less harmful modes of attacks. Authorities have not always been successful in this aim
e.g., increased US embassy security led to a decrease in such attacks, which usually resulted in
no injuries, and to an increase of assassinations of embassy personnel as they left secure grounds
(Enders and Sandler, 1993). In light of these substitutions, the authorities must also raise the
difficulty of all modes of attacks e.g., by limiting terrorist resources or through intelligence on
terrorist operations.
INTERVENTIONS AND THE DATA
Six interventions or suspected changes to the terrorist time series are germane to our
analysis and discussion. These interventions are listed in Table 1 along with their abbreviations,
description, and initiation period. Although our interest is to apply a methodology that allows
for ex post data identification of significant changes in the time series, these ex ante influences,
due to either policy changes (i.e., metal detectors at airports, enhanced embassy security, or a
retaliatory raid) or political events (i.e., the rise of religious fundamental terrorism or the start of
the post-cold era),9 are required for updating the linear intervention-based analysis to 1999 and
for comparing this latter analysis to the nonlinear techniques presented at a later point. In
previous papers, five of these six interventions resulted in significant shifts to the aggregate
terrorist series and its various component series. The sole exception is the US retaliatory raid on
Libya, which resulted in just an immediate impact that dissipated rapidly as the series returned to
its pre-intervention mean.10
Data on transnational terrorism incidents are drawn from International Terrorism
Attributes of Terrorist Events (ITERATE), which records, among other things, the incident date,
its location, type of event, and casualties (i.e., deaths or injuries), if any. ITERATE 2 covers
10
1968-77 (Mickolus, 1982), ITERATE 3 covers 1978-87 (Mickolus, Sandler, Murdock and
Fleming, 1989), and ITERATE 4 covers 1988-91 (Mickolus, Sandler, Murdock and Fleming,
1993). To bring the data set up to date, we coded the necessary variables for 1992:1-1999:4
based on written descriptions provided by Mickolus. Coding consistency for ITERATE 2 and its
various updates has been preserved by applying the same criteria for defining transnational
events and associated variables. This consistency was enhanced owing to an overlap among
coders and monitors e.g., Sandler participated in the coding of the data for 1977:1-1999:4.
ITERATE drew its information from the world print and electronic sources including the
Associated Press, United Press International, Reuter tickers, major US newspapers (e.g., the
Washington Post and the New York Times), and the Foreign Broadcast Information Service
(FBIS). The FBIS Daily Reports, which draws from hundreds of world print and electronic
media sources, served as the single most important source up through the start of 1996.11
ITERATE does not contain information about state sponsorship, because countries keep this
information secret; hence, we cannot distinguish such events in our analysis.
ITERATE does not classify incidents as transnational terrorism that relate to declared
wars or major military interventions by governments (e.g., Chechnyan acts against Russian
military personnel), or guerilla attacks on military targets conducted as internationally
recognized acts of belligency. If, however, the guerilla attacks were against civilians or the
dependents of military personnel in an attempt to create an atmosphere of fear to foster political
objectives, then the attacks are considered terrorism. Palestinian acts in Israel that do not harm
foreigners are not classified as transnational terrorism. While a domestic event may become
transnational if a foreigner is the unintended victim, instances of this are rare. If this randomness
of victims was great, then the large number of US victims, who are the intended target on
average of about 40 percent of all transnational acts (US Department of State, 1989-2001), would
11
not consistently characterize the data totals each year. Official government-sanctioned acts in
response to terrorist attacks, such as the US bombing of Libya or US seizure of an Egyptian
plane carrying the terrorists from the Achille Lauro incident, are not themselves coded.
ITERATE also excludes unintended acts from the data set. If, for example, a foreign newspaper
reporter is killed in the cross fire between government troops and guerillas, the reporter's death is
not considered a terrorist assassination. ITERATE, however, does code terrorist acts against
foreign aid workers or UN peacekeepers.
We extract three quarterly time series from ITERATE: (i) a DEATH series, where one or
more individuals died as a result of the incident; (ii) a WOUNDED series, where one or more
individuals were injured, but no one died, as a result of the incident; and (iii) a
NONCASUALTIES series, where no one died or was injured as a result of the incident. We use
terrorist incident count data computed on a quarterly, rather than weekly or daily, basis to
eliminate zero-valued observations, inconsistent with the underlying normal distribution
assumption of the various autoregressive (AR) analyses (Harvey, 1989). Based on Enders and
Sandler (2000), we shall focus on the DEATH series, which has the most deterministic factors of
the three series owing to its intensity. This earlier study showed the NONCASUALTIES series
to be essentially random after detrending and the WOUNDED series to be less deterministic than
the DEATH series. Nevertheless, we shall apply our analysis to all three series.
DUMMY VARIABLES VERSUS THE THRESHOLD MODEL
A number of papers have tried to estimate and forecast transnational terrorist events. One
key issue is to ascertain the effects of various policy interventions and political events on the
occurrence of transnational terrorism. For example, Enders and Sandler (2000) estimated the
12
following autoregression (with t-statistics in parentheses):
yt = 4.037 + 0.406 yt-1 + 5.62 METALt 0.26 EMB76t 5.92 EMB85t
(1.77) (3.22)
(2.28)
(0.11)
(3.20)
7.93 LIBYAt + 4.17 FUNDt + 6.77POSTt
(1.30)
(1.89)
(3.19)
(5)
where yt is the quarterly number of incidents with one or more deaths. METALt, EMB76t,
EMB85t, LIBYAt, FUNDt, and POSTt are all dummy variables that represent the various
intervention points as defined previously in Table 1.
The use of dummy variables in this fashion yields some interesting findings. The impact
of metal detectors in airports is estimated to have increased the number of incidents with deaths
by 5.62 incidents per quarter, implying a substitution from skyjackings into more deadly
events.12 The steady-state value of this increase rises to 9.46 [= 5.62/(1 0.406) ] incidents per
quarter. Fortification of U.S. embassies in 1985, but not in 1976, is found to decrease the shortrun number of incidents with deaths by 5.92 incidents per quarter, but with a long-run effect of
9.97 fewer incidents per quarter. Moreover, the break-up of the Soviet Union is found to have a
large positive impact on terrorism: the immediate impact effect is estimated to be 6.77 incidents
per quarter rising to a total of 11.4 incidents per quarter. In Figure 1, incidents per quarter are
measured on the vertical axis and the years on the horizontal axis. The dashed line represents the
actual number of fatal incidents, while the vertical lines indicate the four significant intervention
dates. The solid locus with horizontal segments shows the estimated magnitudes of the effects of
the interventions. To depict the impact of each intervention, we set y1 equal to the actual value
of death incidents in 1970:1 and generated the remaining values using equation (5). It is clear
from Figure 1 that the mean number of incidents rose from about 6.5 to about 16 per quarter after
the installation of metal detectors in 1973. The values are shown through only 1996:2 since
equation (5) was estimated using data from 1970:1 to 1996:2.
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Some words are instructive about the political events behind some of the various peaks in
Figure 1. The peaks in 1976 and 1977 are primarily attributed to activities of Palestinian groups
outside of Israel and left-wing European terrorists (Mickolus, 1982). The spikes in 1981, 1983,
and 1985 are due to terrorist activities by left-wing groups in Europe and South America, as well
as from spillover terrorism from the Middle East (Mickolus et al., 1989). The Libyan retaliatory
raid by the United States and the backlash it caused are behind the peak in 1986. Numerous
Middle-East-motivated deadly terrorist attacks, coupled with Afghan rebel attacks in Pakistan,
led to the spike in 1988 (US Department of State, 1989). Finally, the peaks in the early 1990s
are rooted in religious fundamentalism (by HAMAS and others) and in separatism (in Sri Lanka)
(US Department of State, 1990-96). Actions by the Kurdish Workers Party in Turkey and by
narcoterrorists in Colombia also contributed to these totals. The Afghanistan War trained many
individuals with fundamentalist views, who account for many lethal events in the 1990s and
beyond.
The use of multiple dummies, however, raises a number of concerns as follows:
1. There is a danger of ex post fitting if the break points dates are chosen as a result of
an observed change in the variable of interest, then test statistics lose their importance. Clearly,
with enough dummy variables, any series can be fitted to any degree desired. The problem is
reinforced by the fact that the starting dates for the FUND and POST variables were found by a
grid search method, for which the two starting dates were those that maximized the overall fit of
the regression (Enders and Sandler, 1999, 2000). There is, however, less of a problem if
interventions are chosen ex ante based on hypothesized changes to the data that are then tested
for significance.
2. Other incidents that roughly coincide with the break point dates may, in part, be
responsible for the observed change in the series. For example, events surrounding the demise of
14
the Soviet Union (as measured by POST) came about the time of the war in Kuwait. As
recognized by Enders and Sandler (2000), it is exceedingly difficult to distinguish between the
influences of two near, but distinct, events.
3. The efficacy of the estimates cannot rely on the usual asymptotic properties of an
autoregression. If there is a single break point, Lutkepohl (1991) showed that the standard
asymptotic properties hold if it is assumed that observations on both sides of the break increase
as sample size increases, but that a logical problem arises in the presence of multiple breaks.
Given that there are a fixed number of observations lying between EMB76 and EMB85,
increasing the sample size does nothing to increase the number of points lying between these two
break points. Lutkepohl (1991:410) stated that the large sample 2-distribution may be
used if the periods between the interventions is reasonable large. Since no small sample results
are available it is not clear, however, how large is large enough to obtain a good approximation
to the asymptotic 2-distribution.
4. The interventions need not be modeled as [0, 1] dummy variables; for example, Enders
et al. (1990) used an alternative form for the METAL dummy. Although the United States began
installing metal detectors in its airports in the first quarter of 1973, it took almost a full year for
installation to be completed internationally at major airports. As such, they used an intervention
variable equal to 1/4 in 1973:1; 1/2 in 1973:2; 3/4 in 1973:3; and 1 in 1973:4. More generally,
interventions can have temporary or permanent effects on a series that may grow or fade over
time. The standard way to determine the best form of the intervention variable is to use the one
that provides the best in-sample fit.
5. The effects of the different dummies may overlap each other. This could be especially
problematic if there is any misspecification in the way that each dummy is allowed to affect the
system. For example, instead of being a 0 versus 1 dummy, suppose that the importance of
15
Islamic fundamentalism has grown over time. The POST variable will then capture some of this
effect, leading some of the subsequent increase in terrorism resulting from FUND to be wrongly
attributed to POST.
6. The effects of the interventions are allowed to affect only the mean of the series, even
though the autoregressive coefficient(s) may themselves be affected by the changes.
7. Finally, there may be other events that influence terrorism, not included in the model
e.g., political events in the Middle East or Latin America may have had profound effects on the
terrorism series.
Some of the problems with multiple dummy variables are apparent when we re-estimate
equation (5) using an updated version of ITERATE with observations for 1996:3-1999:4. After
incorporating these 14 additional observations into the data set, we obtain the following
regression estimates of the DEATH series:
yt = 4.10 + 0.423 yt-1 + 4.71 METALt 0.479 EMB76t 4.91 EMB85t
(2.10) (4.98)
(1.89)
(0.201)
(2.65)
8.64 LIBYAt + 4.02 FUNDt + 2.50 POSTt,
(1.37)
(1.82)
(1.48)
AIC = 1008.2, SBC = 1030.4, (6)
where AIC is the Akaike Information Criteria and SBC is the Schwartz Bayesian Criteria.13 If
we omit EMB76t and LIBYAt we obtain:
yt = 4.15 + 0.417 yt-1 + 4.54 METALt 5.29 EMB85t + 3.80 FUNDt + 2.87 POSTt,
(2.13) (4.93)
(1.99)
(2.88)
(2.11)
(1.72)
(7)
AIC = 1006.3, SBC = 1022.9.

Even if we use equation (7), it is striking that METALt is barely significant at the 5% level
and POSTt is not significant at the 5% level. Moreover, the absolute values of the magnitudes of
the coefficients and the associated t-statistics for EMB85t and FUNDt are all closer to zero than
in equation (5). Thus, when we use the updated data, it appears that the interventions were not
that important for the DEATH series after all. To explain the erosion in the coefficients and their
16
significance, we note that the number of incidents with deaths declined throughout the updated
sample period (see the extended portion of the dashed line in Figure 1), so that the magnitude of
the jump in incidents attributed to the demise of the Soviet Union was not sustained. Moreover,
the decrease in the overall mean of the incident series pushed the t-statistics for the previously
significant interventions closer to zero. Quite simply, the recent decline in the number of
DEATH incidents makes it difficult to interpret the importance of the previous interventions.
Perhaps, the importance of POSTt had just a temporary effect lasting only a few years (see our
previous point 4); there may have been other influences not captured by the interventions (see
point 7); or the original effect of POSTt was due to overfitting (see point 1). Of course, it would
be possible to capture the decline in terrorism with yet another dummy for the 1996:3-1999:4
period, but, this simply compounds the problems encountered when using multiple interventions.
A word of caution and clarification is in order before we present some nonlinear time
series methods for addressing these issues. Linear intervention analysis has its place if
intervention points are chosen ex ante based on theoretical priors. For a skyjacking time series,
the significant of metal detectors would remain even with the addition of another few years of
data because these detectors had such a large and sustained impact on skyjackings. The
influence of metal detectors on the DEATH series, which includes all incidents and not just
skyjackings, is apt to be more tenuous as equations (6)-(7) indicate. Thus, our exploration of
alternative time series methods is not intended to dismiss intervention analysis when used with
theoretical priors in the proper setting.
REGIME-SWITCHING ESTIMATION
One way to circumvent some of the above problems is to estimate the DEATH series
17
using a type of regime-switching model. Intuitively, there may be several states of the world and
the severity of terrorism may differ in each. Suppose, for example, that a political event or
policy intervention occurs that causes the amount of terrorism to switch into the high state.
Since terrorists are using relatively large amounts of their scarce resources, it would be
surprising to find that attacks exhibit a high degree of persistence in the high state. Terrorism
could persist in this high state for a while until another event takes place that switches the system
into the low state. Terrorism could then remain low until yet another political or policy shock of
sufficient magnitude occurs that switches the system back into the high state. If our theoretical
model about resource allocation is correct, then we anticipate that activity levels above the
estimated mean of the series for the high state cannot last for long, unlike the low-state scenario
where terrorist resources are not stretched and departures from the mean can persist. The cause
of the shock sufficient to switch the system could be unknown to the researcher; nevertheless, it
is possible to estimate the behavior of the terrorist incidents in the various states.
Consider a two-regime version of the threshold autoregressive (TAR) model developed
by Tong (1983, 1990):
p
p
y t = I t 0 + i y t i + (1 I t ) 0 + i y t i + t ,
i =1
i =1
(8)
where yt is the series of interest, the i, and i are coefficients or constants to be estimated, is
the value of the threshold, p is the order of the TAR model, and It is the Heaviside indicator
function:
1 if y t 1
It =
0 if y t 1 < .
(9)
The nature of the system is that there are two states of the world. In the high-terrorism
state, yt-1 exceeds the value of the threshold so that It = 1 and (1 It ) = 0, where yt follows the
18
autoregressive process, 0 + iyt-i. Similarly, in the low-terrorism state, yt-1 falls short of the
threshold , so that It = 0 and (1 It ) = 1, where yt follows the autoregressive (AR) process,
0 + iyt-i. There are essentially two attractors or potential equilibrium values: the system is
drawn toward 0/(1 i) in the high state and toward 0/(1 i) in the low state. Moreover,
the degree of autoregressive decay will differ across the two states if for any value of i, i i.
The key feature of the TAR model is that a sufficiently large t shock can cause the system to
switch between states.
The momentum threshold autoregressive (M-TAR) model used by Tong and Lim (1980)
and Enders and Granger (1998) allows the regime to change according to the first-difference of
{yt-1}. Hence, equation (9) is replaced with
1 if y t 1
It =
0 if y t 1 < .
(10)
The M-TAR model is useful in capturing situations in which the degree of autoregressive decay
depends on the direction of change in {yt}. For example, Enders and Granger (1998) showed
that interest rate adjustments to the term-structure relationship display M-TAR behavior. If,
however, all i = i, then the TAR and M-TAR models are equivalent to an AR(p) model.14
,I2LVNQRZQWKHQWKHHVWLPDWLRQRIWKH7$5DQG0-TAR models is straightforward.
Simply set the indicator function according to equations (9) or (10) and form the variables Ityt-i
and (1 It )yt-i. The coefficients of equation (8) can be estimated using ordinary least squares
(OLS), and the lag length p determined as in an AR model.15:KHQ2LVXQNQRZQ&KDQ
showed how to obtain a super-consistent estimate of the threshold parameter. For a TAR model,
the procedure is to order the observations from smallest to largest such that:
y1 < y2 < y3 ... < yT.
(11)
For each value of yjOHW2 yj, set the Heaviside indicator according to equation (9), and estimate
19
an equation in the form of equation (8). The regression equation with the smallest residual sum
of squares contains the consistent estimate of the threshold. In practice, the highest and lowest
15 percent of the {yj} values are excluded from the grid search to ensure an adequate number of
observations on each side of the threshold. For the M-TAR model, equation (11) is replaced by
the ordered first-differences of the observations.
Notice that the TAR model overcomes a number of the problems involved with the use of
dummy variables. Most importantly, the dates of the regime switch at which the series passes
the threshold are not specified ex ante by the researcher; instead, the data itself determine
whether the series is in the high- or low-terrorism state. Since there are no specific intervention
points, the standard asymptotic properties of the estimates hold. For example, the asymptotic
properties of the estimates are such that individual coefficients can be tested using standard tstatistics and joint restrictions such as the symmetry restriction that all i equal all i can be
tested using an F-test. Obviously, there are no overlapping dummy variables and the alternative
regimes are allowed to affect the degree of autoregressive decay as well as the mean of each
series. If, therefore, the goal is to determine the magnitude of any specific intervention, such as
the effect of the end of the Cold War, then the TAR model is not especially useful, because it
includes no exogenous variables. This again emphasizes that alternative time series methods can
fulfill different purposes making them complementary.
THE ESTIMATED THRESHOLD MODEL
We begin by estimating the DEATH series as a threshold autoregressive process with a

single lagged value. As indicated by equation (7), we search over all potential thresholds to
obtain (with t-statistics in parentheses):
20
yt = [ 19.95 + 0.07yt-1 ] It + [ 7.09 + 0.47yt-1 ] (1 It ),

(4.63) (0.38)
(3.10) (2.39)
(12)
where the estimate of the threshold is = 18. If we purge the model of the insignificant lagged
coefficient occurring whenever yt-1 18 and re-estimate the model, we obtain:16
yt = [ 21.53 ] It + [ 7.09 + 0.47yt-1 ] (1 It ),
(23.02)
(3.12) (2.41)
(13)
AIC = 1005.4, SBC = 1016.5.
Diagnostic checking indicates that the model is appropriate. For example, the first eight
autocorrelations of the residuals are less than 0.13 in absolute value and the Ljung-Box Qstatistics for 4, 8, and 12 lags indicate that there are no significant residual correlations at
conventional levels. We also estimate the model setting p = 2, and find that the coefficients of
yt-2It and yt-2 (1 It) are both insignificant. We set the indicator function using the M-TAR
specification. Our estimated models never fit the data as well as the TAR models reported
above.17 Finally, Tsays (1989) method of arranged autoregressions do not yield any evidence of
multiple thresholds.
For comparison purposes, we estimate the DEATH series as a linear autoregression. The
best-fitting model is the following AR(1) equation:
yt = 6.81 + 0.56yt-1,
(5.03) (7.25)
AIC = 1012.1, SBC = 1017.7.
(14)
Notice that AIC and SBC both select the TAR model over the linear model. In addition, as
measured by either criteria, the TAR model fits better than either intervention model reported in
equations (6) and (7). This is particularly important since the TAR model makes no use of the
explanatory variables employed in the intervention model. In fact, the SBC actually selects the
linear model over either of the intervention models!
The threshold model yields very different implications about the behavior of the terrorism
DEATH series than the linear models. The linear AR(1) model indicates that the sequence
21
convergences to the long-run mean of approximately 15.5 incidents per quarter [ 6.81 (1.0
0.56) 15.5 ]. Moreover, the degree of autoregressive decay is always constant. Regardless of
whether the number of incidents is above or below the mean, the degree of persistence is
estimated to be 56%. In contrast, the estimated threshold model in equation (13) suggests there
is no single long-run equilibrium value for the number of incidents, since there are high- and
low-terrorism regimes or states. In the low state, the system gravitates toward 13 incidents per
quarter [ 7.09 (1.0 0.47) 13 ]. The point estimates of this low-state regime are similar to
those of the linear AR(1) model. When the number of incidents exceeds the 18-incident
threshold, there tends to be an immediate jump to 21.53 incidents per quarter. Whenever the
number of incidents exceeds 21.53, we estimate that there will be an immediate decline to 21.53
incidents in the subsequent quarter, so that, there is no persistence for terrorist activity exceeding
the key value of 21.53 incidents.18 The high-incident state can be maintained until a shock of
sufficient magnitude causes a switch of regime; but, the number of events in this high-incident
state cannot be maintained at more than 21.53 incidents. Since the estimated standard deviation
RI^0t} is equal to 6.14, the magnitude of a typical shock is likely to cause a regime switch. In
fact, we uncover a number of short-lived terrorist campaigns of heightened activity (including
one immediately following POST) see Figure 1.
We also examine other incident series for threshold autoregressive effects. We find no
evidence of any autoregressive behavior in the non-causality series, which is dominated by
threats, hoaxes, letter bombs, and other low-intensity activities. As these incidents use few
resources, it is to be anticipated that they contain no predictable pattern. The number of
incidents containing wounded individuals (but no deaths) appeared to be a symmetric AR(2)
process. One explanation is that a TAR specification is not appropriate to capture the form of the
non-linearity in this series. Another is that these incidents use few resources relative to incidents
22
with deaths, so that there may not be any important differences in the persistence of this type of
terrorism.
THE FOURIER APPROXIMATION
As indicated above, the TAR model cannot ascribe the effects of a regime switch to any
particular event. An alternative way to capture any potential non-linearity's in the data is to use
the methodology of Ludlow and Enders (2000), where a simple modification of the
autoregressive framework allows the autoregressive coefficient to be a time-dependent function
GHQRWHGE\.t). For simplicit\FRQVLGHUDQ$5SURFHVVZLWKRXWDQLQWHUFHSWWHUP,I.t) is
an absolutely integral function, for any desired level of accuracy, then it is possible to write:19
yt .t)yt-10t,
(15)
s
2 k
2 k
with (t)= A0 + Ak sin

t + B k cos
t ,
T
T
k=1
where s refers to the number of fUHTXHQFLHVFRQWDLQHGLQWKHSURFHVVJHQHUDWLQJ.t).20

The key point is that the behavior of any deterministic sequence can be readily captured
by a sinusoidal function even though the sequence in question is not periodic. As such, nonlinear coefficients may be represented by a deterministic time-dependent coefficient model
without first specifying the nature of the asymmetry. The nature of the approximation is such that
the standard ARMA model emerges as a special case. If the actual data-generating process is
linear, all values of Ak and Bk in equation (15) should be zero. Thus, instead of positing a
specific model, the specification problem is transformed into one of selecting the proper
frequencies to include in equation (15). Ludlow and Enders (2000) called the approximation in
equation (15) an F-ARMA process. Since the value of s can be large, the estimation problem is
23
to determine the particular Fourier coefficients to include in the analysis.
More generally, both the intercept and the degree of autoregressive decay may fluctuate
over time and it is possible to apply the method to both coefficients. Because the nonlinear
estimation may be quite complicated, we restrict ourselves to only two frequencies for the
intercept and only one (possibly different) frequency for the degree of autoregressive decay. We
use nonlinear optimization methods to obtain the maximum-likelihood estimates of:
2 k1
2 k1
2 k2
2 k2
t) + c2 cos(
t) + c3 sin(
t) + c4 cos(
t)
T
T
T
T
2 k3
2k3
+ a1 yt 1 + a2 sin(
t) y t -1 + a3 cos(
t) y t -1 + t.
T
T
y t = c0 + c1 sin(
(16)
The interpretation of equation (16) is that the magnitudes of any fluctuations in the
intercept term are captured by nonzero values of c1 through c4. Similarly, fluctuations in the
degree of autoregressive decay are captured by nonzero values for a2 and a3. The frequencies of
the fluctuations in the intercept are given by k1 and k2, while the frequency of the fluctuations in
the autoregressive parameter is given by k3. Clearly, the linear AR(1) model is the special case
of equation (16) where the c1 = c2 = c3 = c4 = a2 = a3 = 0. Because we are not interested in the
very high frequency changes, we limited the analysis to frequencies no greater than 10. With
100 observations, Ludlow and Enders (2000) found that the critical values for a2 and a3 are each
2.06, 2.39, and 3.02 at the 10%, 5%, and 1% significance levels, respectively. Similarly, Davies
(1987) found that the critical values for the F-statistic of c1 = c2 = 0 (c3 = c4 = 0) are 10.66,
12.18, and 15.63 at the 10%, 5%, and 1% significant levels.
The Fourier approximation in equation (16) is something quite different from the
standard Spectral Analysis. The periodiogram used in Spectral Analysis is obtained from the
Fourier expansion:
T /2
y t = c 0 + [c k sin( 2kt / T ) + c k cos(2kt / T )]+ t .

k =1
(17)
24
In particular, Spectral Analysis uses all possible integer frequencies in the interval k = [1, T/2] in
order to assess relative contribution of high, medium, and low frequencies to the total variation
of {yt}. Instead, equation (16) uses only the two most significant frequencies in order to
approximate a time-varying intercept term. This is supplemented by a (possibly) third frequency
to approximate a time-varying degree of autoregressive decay. Estimating (16) and eliminating
the coefficient with t-values less than 1.96 in absolute value, we obtain:21 c0 = 11.84 (11.77), c1
= 3.24 (5.63), c3 = 2.85 (5.31), a1 = 0.24 (4.05) and a3 = 0.14 (2.96), where t-statistics are
in parentheses. In addition, the frequencies are k1 = 2.105, k2 = 3.23, and k3 = 6.80.
Given that there are two frequencies for the intercept and that the degree of
autoregressive decay oscillates, the time path for the estimated series is highly nonlinear. In
order to depict the estimated movements of {yt}, we set y1 equal to the actual number of
incidents in 1970:1 and generated the values through 1999:4 using our estimated coefficient
values. The resulting series is shown as the fluctuating solid line in Figure 2.22 For comparison
purposes, we also include the actual number of incidents and the effects of the interventions
(now updated through 1999:4) that were shown in Figure 1.
The intervention and the F-ARMA models both suggest (i) an increase in DEATH
incidents after the installation of metal detectors in 1973 (METAL), (ii) an increase near 1979
(around the time of FUND), (iii) a sharp decline at the time of embassy fortifications in 1985
(EMB85), and (iv) a relatively constant time profile through 1992. Overall, the F-ARMA model
tracks the actual series much better than the intervention model. There are, however, some
interesting comparisons to be drawn from the different estimates of the intervention and Fourier
models. As displayed in Figure 2, the intervention model in equation (7) estimates that metal
detectors had a long-run impact of 7.79 incidents per quarter with the full impact on the DEATH
series being attained almost immediately. The Fourier model tells a different story. Beginning
25
in 1973:1, the estimated number of DEATH incidents rose steadily until the third quarter of
1976. If all of this increase can be ascribed to the deployment of metal detectors, the estimated
long-run impact is 14 DEATH incidents per quarter (22 estimated incidents for 1976:3 minus
eight estimated incidents in 1972:4). Part of the discrepancy between the two estimates might be
that the installation of the detectors was not immediate. The installation of these detectors in US
airports was immediate in 1973:1, while their installation in non-US airports took place more
gradually (Enders et al., 1990).
A very interesting comparison emerges with respect to the POST variable. The
intervention results in equation (7) give the long-run impact of POST to be 4.92 additional
DEATH incidents per quarter. In contrast, the Fourier model estimates that the DEATH series
gradually rose from approximately 11 to 27 incidents throughout the 1991-94 period. Thereafter,
DEATH incidents steadily declined until the end of the sample period.
IMPLICATIONS AND POLICY RECOMMENDATIONS
In this section, we shall draw some implications and policy recommendations in regards
to the events of 11 September 2001, based on the analysis of this paper and our cumulative work
on examining terrorist time series. The attack on the World Trade Center and the Pentagon came
during a time when transnational terrorism was in a relatively low-activity period. Retaliatory
strikes typically produce a shock to the time series that generates higher levels of attacks as
terrorists protest the action (Enders and Sandler, 1993). An intertemporal substitution occurs as
terrorists move attacks planned for the future into the present to demonstrate their displeasure.
The TAR analysis findings indicate that this heightened activity can be sustained for a long
period, because it will be coming during a low-activity period when resources can be shifted
26
from nonterrorist activities of these terror networks. Thus, nations associated with the alliance
forged by the United States must be vigilant for these increased attacks not only during the
period of military action begun on 7 October 2001, but also well after this period. This means
that national guard at US airports may need a longer deployment than originally planned (i.e.,
longer than six months).
All time series associated with terrorist events display cyclical behavior (Enders et al.,
1992; Enders and Sandler, 1999). This is also true of the time series with one or more casualties
(i.e., death or injuries). In Enders and Sandler (2000:322), the length of the cycles for the
casualties time series is just under two years. Thus, the trough in Figure 2 at the end of 1999 is
anticipated to be followed by a peak toward the end of 2001, which proved to be an accurate
prediction. Our work23 on the relationship between the rise of fundamentalist terrorism and
heightened casualties from terrorist attacks suggests that terrorist attacks as a reaction to
retaliatory strikes will involve a greater number of casualties than, say, the increased terrorism
following the US retaliatory raid on Libya in April 1986.
If there is a basic message from our work on the effects of policy interventions, it is that
piecemeal policy is ineffective.24 That is, efforts to secure US airports and borders will cause
terrorists to stage their attacks at other venues and in other countries against Americans. Quite
simply, terrorists respond to higher prices for one mode of attack stemming from a policy
intervention (e.g., better metal detectors and security screening at airports) by substituting into an
alternative mode where measures have not been taken. The installation of metal detectors in
airports cut down on skyjackings but was associated with an increase in other kinds of hostagetaking events (Enders and Sandler, 1993). Despite recent events in New York and Washington,
DC, Americans are still most vulnerable abroad. Consider the statistics for 2000, during which
there were 423 transnational terrorist attacks worldwide. Although not a single such attack
27
occurred in the United States, 200 of these attacks were against US people or property (US
Department of State, 2001:1). This poses a real dilemma for the United States, because security
measures abroad cannot be dictated to other countries. Actions by the United States to protect its
diplomatic and military personnel abroad will make its unprotected citizens more inviting
targets.
The kinds of actions that work best accomplishes one of two outcomes: a reduction in
the resources of terrorists or an increased difficulty associated with all modes of attack.
Coordinated strikes to hit the al-Qaida network throughout the world are required to attain the
first outcome. Cooperative efforts worldwide to freeze al-Qaidas assets would also foster the
first outcome. To raise the price of all modes of terrorist attacks, countries would have to
increase security throughout society, which impinges on personal freedoms in liberal
democracies. Moreover, such massive actions would be prohibitively costly to countries. A
cheaper means for accomplishing the second outcome would be better field intelligence so that
any kind of planned terrorist incidents can be stopped in the planning stage.
The fight against transnational terrorism presents a serious collective action problem to
nations confronting the threat of terrorist acts. Destroying a global terrorist network represents a
pure public good to all targeted nations, because its destruction yields benefits that are both
nonrival and nonexcludable among nations (Sandler, 1997:129-138). As such, nations are apt to
free ride on the efforts of the country or countries that perceive the greatest benefits from such
actions. Given the events of 11 September 2001, the country with the most at stake from
destroying this network is the United States, followed by the United Kingdom, which lost the
second greatest number of its citizens in the World Trade Center attack. The US interest is
bolstered by it being the primary target of transnational terrorism for the last couple of decades
(US Department of State, 1989-2001). Despite the invocation of Article 5 of the NATO Treaty,
28
the rooting out of the al-Qaida and other networks is anticipated to be primarily an American
operation. There is an irony here, because collective action among terrorist groups in sharing
training and financing has been quite substantial. To date, this suggests that terrorists are more
united in their common goals than are countries in addressing the transnational terrorist threat.
Perhaps, the recent horrors will change this collective action failure.
In the terrorists attempt for greater brutality and casualties to capture media attention, it
will be difficult to outdo the carnage or terror of 11 September. The casualties from the four
simultaneous skyjackings are equal to the cumulative deaths from all transnational terrorist
events between 1985 and 2000 (US Department of State, 1989-2001). This suggests that
symbolic targets at home and abroad that rival the World Trade Center or the Pentagon may be
chosen for the annual spectacular event that has characterized transnational terrorism over the
last 30 or so years. Another means for achieving greater casualties would be to resort to
weapons of mass destruction (e.g., biological or chemical agents) as portended by the Sarin
attack on the Tokyo subway on 20 March 1995 by Aum Shinrikyo.25 Clearly, transnational
terrorism has taken on a new threat level since 11 September.
This heightened threat level suggests that this date should be investigated as an
intervention point in future time series studies as time progresses. Have the events of this day
changed the pattern of transnational terrorism? For example, do future attacks involve greater
numbers of casualties? Has the mix of attack modes or where terrorist incidents are staged
changed since 11 September? These are questions for future time series investigations. Another
issue concerns the war on terrorism coordinated by the United States that started on 7 October
2001. The effectiveness of this war can be evaluated using intervention analysis, interventionVAR techniques, and TAR methods. Given its greater objective to root out terrorist networks,
this retaliatory war might have a more permanent impact than past episodic retaliations.
29
CONCLUDING REMARKS
Each advance in the study of time series provide a new method that can be applied to the
analysis of transnational terrorism. In the current paper, we have used a regime-switching model
to find turning points in the time series of events, for which one or more persons die. The socalled DEATH series is used because it is more predictable than less-intense series where
individuals are either injured or unscathed. A regime-switching model offers a better fit than
either a linear AR(1) representation or an intervention representation, with one or more dummy
variables for policy changes. With the regime-switching depiction, increases in activity above
the mean are not sustainable during high-terrorism eras, while there is a 56% persistence for
changes around the mean during low-terrorism eras. This finding has implications for policy or
political decisions that may result in either a regime switch or else a shock, insofar as the
persistence of such shocks depends on whether terrorist activities are already running high or
low.
We also applied a Fourier approximation to the nonlinear estimates of the DEATH series
for 1970:1-1999:4. In so doing, we derive better estimates than those that characterize earlier
articles. Our Fourier-series-based estimates are superior in identifying recent downturns in the
lethality of transnational terrorism in the post-cold war era.
The appropriate technique depends on the issue under investigation there is no time
series method best for all issues. The TAR model is best applied to a single time series at a time
in contrast to the VAR model. If, for example, the effectiveness of a policy intervention e.g.,
heightened security measures at US airports in the wake of the 11 September attacks is under
scrutiny, then intervention analysis applied to the study of multiple time series is the preferred
30
methodology. When a single time series is pertinent, TAR and intervention analysis can be both
applied to determine which results have the better statistical properties. In the case of the
DEATH series, TAR appeared to be the more appropriate representation.
31
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Footnotes
1. This definition captures the essential features of those in the literature. See Hoffman
(1988, chap. 1), Mickolus (1982), and Schmid and Jongman (1988).
2. Since no claim of responsibility or demands have been made in wake of the attacks,
no one knows for sure what these atrocities were intended to achieve. If the attacks were
directed by Osama Bin Laden, as the evidence suggests, then his demands are the ones listed in
parentheses.
3. The seminal study on the terrorist dilemma confronting a liberal democracy is
Wilkinson (1986).
4. Articles that analyze trends and cycles include Cauley and Im (1988), Enders, Parise,
and Sandler (1992), and Enders and Sandler (1999). A pioneering analysis by Midlarsky,
Crenshaw, and Yoshida (1980) was the first to employ the autocorrelation function in the study
of terrorist time series.
5. The causality between transnational terrorism and Spanish tourism was investigated
by Ender and Sandler (1991), whereas the relationship between terrorism and foreign direct
investment for a few select countries was studied by Enders and Sandler (1996).
6. On these transboundary externalities, see Sandler and Lapan (1988).
t
t

7. Diminishing returns to terrorists resources are reflected by g R > 0, g R > 0, g RR < 0,

and g RR < 0, where subscripts on the respective gain function indicate first- and second-order
partial derivatives. These partials indicate that resources have a positive, but declining, marginal
impact on gain.
8. Studies on the aftermath of retaliatory raids have consistently found an heightened
level of terrorism following such raids (Enders and Sandler, 1993; Brophy-Baermann and
Conybeare, 1994).
36
9. With the start of the post-cold war era, there is a ratcheting down of the number of
terrorist events as state-sponsors reduced their support of transnational terrorism, and Russia and
the United States had few faceoffs (Enders and Sandler, 1999, 2000; Hoffman, 1998).
10. The impact of these interventions was shown in Enders and Sandler (1993, 1999,
2000) and Enders et al. (1990).
11. For a more in-depth description of the sources for ITERATE, consult Mickolus,
Sandler, and Murdock (1989, vol. 1, pp. ix-xxvi). This source also has the working definition for
transnational terrorism that the coders were instructed to apply.
12. This substitution into more deadly events is also shown in Enders and Sandler
(1993).
13. AIC is calculated as Trss + 2k, where T = number of usable observations, rss =
residual sum of squares, and k = number of parameters estimated. SBC is calculated as Trss +
ln(T)k. Note that the SBC tends to select the more parsimonious model since it heavily
penalizes the inclusion of additional coefficients (k).
14. AR(p) refers to an autoregressive model with a lag length of p periods.
15. To allow for the different intercepts, we must include It and (1 It) as regressors.
16. For the TAR model, the value of has to be estimated. Hence, we include it as a
parameter when calculating the AIC and the SBC (i.e., we add 1 to the value of k ).
17. To save space, we do not report the estimated M-TAR models. Moreover, Tsays
(1989) method of arranged autoregressions do not yield any evidence of multiple thresholds or of
a delay parameter other than unity. Details are available from the authors on request.
18. Similarly, when there are more than 18, but less than 21.53 incidents, we estimate
that there will be a jump to 21.53 units in the subsequent period. Thus the skeleton of the system
is such that there are two long-run equilibria: 13 and 21.53 DEATH incidents per quarter.
37
Because the equilibrium value in the high-terrorism state is close to the threshold value of 18,
shocks are more likely to cause the system to shift from the high to the low state than from the
low to the high state.
/HWWKHIXQFWLRQ.t) have the Fourier expansion:
2k
2k
(t) = 0 + Ak sin
t + B k cos
t
T
T
k =1
and define Fs(t) to be the sum of the Fourier coefficients:

s
2 k
2 k
t + B k cos
t
F s (t) = Ak sin
T
T
k =1
Then, for any arbitrary positive number h, there exists a number N such that:
| .W Fs(t) | h for all s N.
20. The Fourier approximation can also be applied to any changes in the intercept term
and/or any moving-average terms.
21. Davies (1987) provides critical values for the F-statistic but does not provide critical
values for the individual t-statistics. The eliminated coefficients for the mean (i.e., c2 and c4)
each had a t-statistics of less than 1.4 in absolute value. As these coefficients are small relative
to their standard error, the time path of the Fourier model, later shown in Figure 2, is virtually
unaffected by the exclusion.
22. Note that these are not 1-step ahead forecasts instead, they are analogous to the
fitted values from the intervention model. The series shown represents the fitted values of {yt} if
DOOYDOXHVRI^0GGt} had been equated to zero.
23. Enders and Sandler (2000) showed that in recent years, each incident is almost 17
percentage points more likely to result in death or injuries. This increased lethality was related
to the shift away from left-wing terrorism to fundamentalist terrorism.
38
24. For a theoretical model on the ineffectiveness of piecemeal policy, see Sandler and
Lapan (1988).
25. During rush hour, eleven sarin-filled bags planted on five subway trains created
terror, pandemonium, and injuries at fifteen Tokyo subway stations, resulting in the deaths of
twelve people and the hospitalization of more than 5,000.
Figure 1: Effects of the Interventions

Estimated through 1996:2
40
35
Incidents per quarter
30
25
20
15
10
0
70
73
76
79
82
85
88
years
Interventions
Actual
91
94
97
Figure 2: The F-ARMA and Intervention Models

40
35
Incidents per Quarter
30
25
20
15
10
0
70
73
76
79
82
85
88
91
years
Fourier
Actual
Intervention
94
97
Table 1. Interventions
Abbreviation
METAL
Description
Metal detectors installed in US airports on 5 January
1973, followed shortly thereafter by their installation in
airports worldwide.
Starting Date
1973:1
EMB76
A doubling of the spending to fortify and secure US

embassies beginning in October 1976.
1976:4
FUND
The rise of religious fundamentalist-based terrorism

starting with the 4 November 1979 takeover of the US
embassy in Tehran. Intervention date established
statistically in Enders and Sandler (2000).
1979:4
EMB85
Further increases in spending to secure US embassies by

Public Law 98-533 in October 1985.
1985:4
LIBYA
US retaliatory raid against Libya on the morning of 15

April 1986 for its alleged involvement in the terrorist
bombing of La Belle Discothque in West Berlin on 5
April 1986.
1986:2
POST
The start of the post-cold war era with the official demise
of the Warsaw Pact on 1 July 1991 and the breakup of the
Soviet Union on 20 December 1991.
1991:4
* For just LIBYA, the dummy variable for the intervention is 1 for the quarter beginning the
intervention and 0 thereafter. For the other five interventions, the dummy variable remains at
the value of 1 for all periods after the intervention
AN ECONOMIC PERSPECTIVE ON TRANSNATIONAL TERRORISM
by
Todd Sandler
tsandler@usc.edu
213-740-9695
213-742-0281 (fax)
and
Walter Enders*
wenders@cba.ua.edu
205-348-8972
205-348-0590 (fax)
February 2002
*Walter Enders is the Lee Bidgood Chair of Economics and Finance in the School of Business at
the University of Alabama. Todd Sandler is the Robert R. and Katheryn A. Dockson Professor
of International Relations and Economics. He is a member of the School of International
Relations and the Department of Economics at the University of Southern California. Sandler
acknowledges research support from the Center for International Studies, University of Southern
California to update the ITERATE data for 1999-2000. The authors have profited from helpful
comments from Daniel Arce.
AN ECONOMIC PERSPECTIVE ON TRANSNATIONAL TERRORISM

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 definition concerns the presence of a political objective (e.g., getting the United States out
of the Persian Gulf states) that the terrorist acts or campaigns of terror are designed to achieve.
Incidents that have no specific political demand are criminal rather than terrorist acts e.g.,
extortion for profit. Another crucial ingredient is the use of extranormal violence or brutality to
capture news headlines. As the public becomes numb to their acts of violence, terrorists respond
with more ghastly actions to recapture media attention. Thus, the escalation experienced on 11
September 2001 came as no surprise to those who study terrorism. Moreover, terrorists often
direct their violence and threats toward a vulnerable target group, not immediately involved with
the political decision-making process that they seek to influence. The two planes that were
crashed into the World Trade Center fit this pattern, while the planes that were intended for
targets in Washington, DC do not fit this pattern. In a deliberate attempt to create a general
atmosphere of fear, terrorists strike at a variety of targets with alternative modes of operations
2
(e.g., assassinations, bombings, kidnappings), thus making it difficult for the authorities to
anticipate the venue of the next incident. Such actions make attacks appear to be random, so that
a targeted society must expend large amounts of resources to protect a wide range of
vulnerabilities. This simulated randomness provides terrorists with a cost advantage over the
stronger authorities who must defend against the threat that they pose (Hirshleifer, 1991).
Because people tend to overrespond to unlikely catastrophic events while ignoring more likely
daily dangers (e.g., dying in a car accident), terrorists succeed in achieving society-wide anxiety
with a minimal amount of resources.
When a terrorist incident in one country involves victims, targets, institutions,
governments, or citizens of another country, terrorism assumes a transnational character. In the
World Trade Center tragedy, citizens from over 80 countries lost their lives at the hands of
terrorists who crossed into the United States from abroad. Obviously, the four hijackings on 11
September constitute transnational terrorist attacks. The kidnappings of foreigners in Lebanon
during the 1980s, as a protest against Israeli-occupied territory, also represent transnational
terrorism. Transnational terrorist incidents are transboundary externalities, insofar as actions
conducted by terrorists or authorities in one country may impose uncompensated costs or
benefits on people or property of another country. As such, myriad market failures are
associated with collective actions to curb international terrorism.
The application of economic methods to the study of terrorism began with Landes (1978),
who applied the economics of crime and punishment to the study of skyjackings in the United
States. Economic methodology is particularly well-suited to provide insights over and beyond
those from a political science approach, the latter of which has stressed definitions, institutional
factors, and case studies in an inductive framework (see, e.g., Crenshaw, 1992; Hoffman, 1998;
Wilkinson, 1986; Wilkinson and Stewart, 1987). First, economic analysis can account for the
3
strategic interactions among opposing interests e.g., the terrorists and the authorities, between
two targeted countries. Second, rational-choice models, based on microeconomic principles, can
be applied to ascertain how terrorists are apt to respond to policy-induced changes to their
constraints. The same methods can be used to analyze how governments react to terroristinduced changes to their policymaking environment. Third, the theory of market failures can
underscore how independent pursuits of well-being by the agents may be at odds with socially
efficient outcomes. Thus, governmental failures may result from well-intentioned policies.
Fourth, various economic empirical methods can be applied to evaluate theoretical predictions
and policy recommendations.
The primary purpose of this article is to demonstrate novel insights already gained from
applying an economic perspective to a political problem. A second purpose is to highlight the
role of game theory and other modern economics tools in the study of transnational terrorism. A
third purpose is to present some new applications of economic methods to this crucial problem
area.
A Look at the Data

To provide a perspective of the nature of the transnational terrorist threat, we compile
Table 1 based on data from the US Department of State (1988-2001). This table indicates the
annual number of transnational terrorist events, the associated deaths, the number of wounded,
and the number of attacks against US people and/or property. A number of essential facts can be
drawn from these numbers. First, transnational terrorism on average results in relatively few
deaths, especially when compared with the annual 40,000 people killed on US highways, so that
the events on 11 September are clear outliers. In fact, the deaths on this single day is
approximately equal to all transnational terrorist-related deaths recorded during the entire 1988-
4
2000 period. Second, transnational terrorism appears to follow a cyclical pattern with much of
the 1990s being a relatively calm era. Something that cannot be seen from Table 1 is that a high
proportion of total casualties for a given year is typically associated with a couple of
spectacular events e.g., the simultaneous bombings of the US Embassies in Nairobi, Kenya
and Dar es Salaam, Tanzania account for 291 deaths and almost 5,000 injuries in 1998 (US
Department of State, 1999). Third, attacks against US interests account for a relatively high
proportion of events. This is particularly noteworthy from an externality viewpoint, because
relatively few incidents take place on US soil in 1998 and 2000, there were no such events,
while, in 1999, there was just one such event (US Department of State, 1999-2001).
By having relatively secure borders, the United States must rely on foreign governments
to protect US citizens and property while abroad. Terrorists that target US interests e.g.,
Revolutionary Organization 17 November in Greece may operate with impunity if the risks to
foreigners are of little concern to the local government.1 This leads to underdeterrence of
terrorism from a multi-country viewpoint (Lee, 1998). If, instead, much of the threat is to a host
countrys interests, then overdeterrence may result as the country does not account for the
transference externality of causing the terrorists to switch their attacks to another less-protected
country. In the overdeterrence scenario, each country engages in a Prisoners Dilemma arms
race to deflect the common terrorist threat to an alternative venue (Sandler and Lapan, 1988).
Unless such actions decrease the overall level of attacks, each country expends resources without
reducing the overall threat or securing their citizens safety, which is particularly relevant when
these citizens are targeted in other countries. This is a real concern for the United States, which
has deflected almost all attacks on its interests to foreign soil.
Data
5
Except for some annual totals, government-collected data sets have not been made
available to researchers. RAND also maintains data on significant transnational terrorist
incidents and has made it available to some researchers. Edward Mickolus (1980, 1982)
developed a data set, International Terrorism: Attributes of Terrorist Events (ITERATE) for
1968-77. This incident-based data set was extended to cover 1978-87 and 1988-91 by Mickolus,
Sandler, Murdock, and Fleming (1989, 1993). More recently, Fleming (2001) has updated some
40 variables for 1992-98, while Sandler has updated select variables for 1999-2000. ITERATE
uses a host of sources for its information, including the Associated Press, United Press
International, Reuters tickers, the Foreign Broadcast Information Service (FBIS) Daily Reports,
and major US newspapers (e.g., the Washington Post, New York Times).
ITERATE poses a number of shortcomings that researchers must take into account when
testing theories. By relying on newspaper accounts, ITERATE is better at chronicling the
actions of terrorists (e.g., number of terrorists in a hit squad, terrorists actions during
negotiations) than in recording those of the authorities. In select instances, government strategy
is revealed by newspapers and is coded by ITERATE. Because ITERATE is an events data set,
researchers must rely on event counts rather than on continuous measures of intensity unless
casualty counts are used (Enders and Sandler, 2000, 2001). ITERATE picks up newsworthy
transnational terrorist incidents, so that there is some bias, which must be recognized. The bias
is worsened since mid-1996 when the FBIS Daily Reports was no longer available to ITERATE
coders.
Despite these difficulties, ITERATE is suited to a wide range of empirical tasks. For
example, it can display trends and cycles for newsworthy events for forecasting purposes (e.g.,
Cauley and Im, 1988; Enders, Parise, and Sandler, 1992). The data have even been used to
investigate terrorist and government bargaining behavior in hostage-taking events i.e.,
6
kidnapping, skyjackings, and takeover of facilities (barricade and hostage-taking events) by
Atkinson, Sandler, and Tschirhart (1987). This latter study applied a time-to-failure model,
where the length of an incident is related to choice variables of the adversaries e.g., sequential
release of hostages, allowing deadlines to pass uneventfully, number of hostages secured.
Based on ITERATE data, we display two quarterly time series all transnational
incidents and bombings in Figure 1 for 1970-2000. From Figure 1, we can see that
transnational terrorism displays peaks and troughs. Bombings are the favorite mode of operation
of terrorists, accounting for about half of all transnational terrorist incidents on average in any
given year. Additionally, the bombing time series tracks the all-incident series rather well. The
latter half of the 1990s represents a downturn in transnational terrorism due, in large part, to
fewer states sponsoring terrorism in the post-Cold War era (Enders and Sandler, 1999). In
Figure 2, the quarterly time series for assassinations and hostage-taking events are displayed for
1970-2000. Cycles are again prevalent. The two time series display far fewer incidents per
quarter than bombings. If terrorists are rational actors, as we suppose, then they should respond
to risk and engage less frequently in those events that are more risky and logistically complex,
such as assassinations and hostage taking (Sandler, Tschirhart, and Cauley, 1983). Insofar as
terrorists must allocate scarce resources from a budget (resource) constraint to alternative tactics,
choices among attack modes are interdependent.
In Figure 3, we display the quarterly percentage of incidents with casualties (i.e., deaths
or injuries) for the 1970-2000 period. This time series is noteworthy because it indicates that
since the early 1990s, transnational terrorist incidents, although down in number, are more likely
to end in injuries or death for targeted individuals. Terrorist experts have documented a change
in the makeup and motivation of the general perpetrators of terrorism since the takeover of the
US Embassy in Tehran in November 1979 (Hoffman, 1998). From the late 1960s until the latter
7
1980s, transnational terrorism has been primarily motivated by nationalism, separatism, Marxist
ideology, and nihilism (Wilkinson, 1986). In the 1990s, the motivation of terrorism has changed
with the emergence of either obscure, idiosyncratic millennium movements or religious-based
fundamentalist groups (Hoffman, 1997, p. 2). Since the beginning of 1980, the number of
religious-based groups has increased as a proportion of the active terrorist groups: 2 of 64
groups in 1980, 11 of 48 groups in 1992, 16 of 49 groups in 1994, and 25 of 58 groups in 1995
(Hoffman, 1997, p. 3).
With the earlier prevalence of leftist-based organizations that wanted to win the hearts
and minds of the people, such terrorist groups avoided casualties except of individuals
characterizing the establishment or the enemy. Today, fundamentalist terrorist groups
purposely seek out mass casualties, viewing anyone not with them as a legitimate target. Thus,
the events of 11 September with their massive casualties of innocent people of all ages came as
no surprise to those of us who study terrorism and warned of an ominous changing nature of
transnational terrorism. In a recent time-series-based study, Enders and Sandler (2000) show
that a significant rise in casualties from transnational incidents can be traced back to the takeover
of the US Embassy in Tehran, as speculated by Hoffman (1998). In recent years, an incident is
almost 17 percentage points more likely to result in death or injury compared with the earlier
eras of leftist terrorism.
Trends and Cycles

Judging by the publics and medias reaction to 11 September, one might conclude that
international terrorism is on the rise, but Figures 1 and 2 (displayed earlier) indicate just the
opposite trend. This misperception may be due to the increasing likelihood of an incident
resulting in casualties, making incidents on average more newsworthy. The standard procedure
8
for ascertaining the form of a deterministic trend is by fitting a polynomial in time (t), where
additional trend terms (i.e., t, t2, t3) are added until the associated coefficient is no longer
statistically significant. For 1968-2000, we investigate trends for six time series extracted from
ITERATE: hostage taking, bombings (of all types), threats and hoaxes (i.e., threatened future
incidents or a false claim for a concurrent incident a bomb aboard a plane, when there is no
bomb), assassinations, incidents with casualties, and all transnational terrorist incidents. Table 2
indicates the polynomial trend estimates for these six series (where time = t), all of which are
characterized by a nonlinear trend. The t-ratios associated with the coefficient estimates are
indicated in parentheses beneath the constant and the time trend terms. Five of the six series are
represented by a quadratic trend with a negative coefficient for the squared time term. This
characterization reflects the fact that series tended to rise in the late 1960s and to decline in the
late 1990s. Only the threats and hoaxes series is represented by a more complicated cubic trend;
nevertheless, this series also displays a similar inverted U-shaped pattern.
In Table 2, the next-to-the-last column on the right reports the F-statistics and their
prob values in brackets, representing the statistical significance of the overall regression.
These significance levels are all zero to three digits, which are strongly supportive of the fitted
nonlinear trend equations. Such fitted trends are not useful for very long-term forecasting,
because there is little reason to believe that the number of incidents will continue to decline.
Instead, the fit of the nonlinear trend cautions against simple statements about a decidedly
upward or downward trend to any form of international terrorism. Such proclamations are
common in the media and the political science literature.2 The trend analysis suggests that there
is persistence in each of the incident series high and low levels of terrorism come in waves or
cycles. Shocks to any incident series are not permanent, so that there is a reversion toward a
long-run mean.
9
Cycles in terrorism data have been attributable to a number of factors. Alexander and
Pluchinsky (1992) explain fluctuations in terrorism using demonstration and copycat effects.
Heightened public sensitivity following a successful terrorist attack induces other terrorists to
strike when media reaction is likely to be great. The anthrax attacks following the events of 11
September appear to correspond to this pattern. Economies of scale in planning terrorist
incidents by terrorist groups or networks may also lead to the bunching of attacks. Cycles may
also stem from the attack-counterattack process between the terrorists and authorities. Public
opinion following a spate of attacks can prompt governments periodic crackdowns that
temporarily create a lull in transnational terrorism. These downturns are subsequently followed
by countermeasures and recruitment by the terrorists as they prepare for a new offensive. Chalk
(1995) indicates that cycles based on public-opinion pressure swings are in the three to five year
range, insofar as time is required for the public to unite and successfully make their demands on
officials to do something a prediction borne out by time series investigations (Enders and
Sandler, 1999).
In our past work, we find that each type of terrorist series has its own characteristic cycle
that hinges on the logistical complexity of the attack mode. Enders and Sandler (1999) and
Enders, Parise, and Sandler (1992) argue that logistically complex events such as skyjackings,
large suicide car bombings, and assassinations will have longer cycles than less sophisticated
events as the attack-counterattack interaction among adversaries takes longer. Such complex
missions utilize relatively large amounts of resources as compared to small explosive bombings,
threats, and hoaxes. Given their resource constraints, terrorists can more easily gear up for a
campaign dominated by small bombs than one relying on more resource-intensive events.
The theory of Fourier series allows a wide class of functions to be expressed in terms of
sine and cosine components. To uncover the underlying cycles in a series, a researcher must
10
regress the detrended values of a series on all frequencies in the interval [1, T/2], where T is the
number of observations. The frequency of a series indicates how fast the underlying cycle is
completed a low (high) frequency implies a long (short) cycle. A graph depiction the
proportionate variation explained by each frequency (called the periodogram) has large peaks
representing the crucial underlying frequencies. Some series with obvious cycles, like sunspots
or average daily temperatures, will display a periodogram with a single focal frequency. Given
the stochastic behavior of terrorists and the measures applied to curb terrorism, there is unlikely
to be one deterministic frequency that dominates the periodicity for any of the six series. Thus,
we use a different approach than trying to identify one particular frequency. Series with long
periods will have most of their variance explained by the low frequencies, whereas series with
short periods will have most of their variance explained by high frequencies.
In accordance with spectral analysis, we detrended each series using the fitted polynomial
trends in Table 2. The last two columns of Table 2 report the total variance of each series and
the proportion of this variance accounted for by the lowest 15 percent of the frequencies.3 We
anticipate that the logistically complex incident types will have relatively large amounts of this
proportion attributable to the low frequencies. The all-events series has a large variance of
1335.56 with just 25.2 percent corresponding to the relatively low frequencies. In marked
contrast, the more complex events of assassinations and those involving casualties have smaller
variances with more of this variance (41.1 and 52.7 percent, respectively) attributed to low
frequencies. Threats and hoaxes display the greatest evidence of short cycles with just 24.7
percent of the variance explained by the longest cycles. The variance results for hostage taking
and bombing events imply moderately short cycles. Only in the case of hostage taking are our
priors not realized.
11
Game Theory and Hostage Taking
To date, there have been seven economic analyses of hostage-taking events i.e.,
Atkinson, Sandler, and Tschirhart (1987), Lapan and Sandler (1988), Selten (1988), Islam and
Shahin (1989), Sandler and Scott (1987), Scott (1991), and Shahin and Islam (1992). The first
three studies stress game-theoretic aspects, while the latter four studies do not. We focus our
remarks around the Lapan and Sandler (1988) study, which is the most general of these three
game-theoretic studies. The question posed by their investigation is whether or not a stated
policy by which a government precommits never to negotiate with hostage takers will have the
intended consequence of keeping terrorists from ever taking hostages. The conventional wisdom
states that if terrorists know ahead of time that they have nothing to gain that they will never
abduct hostages. This belief has become one of the four pillars of US policy with respect to
addressing transnational terrorism i.e., make no concessions to terrorists and strike no deals
(Malvesti, 2001; US Department of State, 2001, p. iii).
The underlying game tree is displayed in Figure 4, where the government goes first and
chooses a level of deterrence, D, which then determines the likelihood, , of a logistical failure
(i.e., failure to secure hostages). Because deterrence expenditure (equivalent to D) must be paid
by the government in all states of the world, it is analogous to an insurance premium and is,
hence, part of the cost to the governments payoff, listed above that of the terrorists, at the four
endpoints to this simple game in Figure 4. More risk-averse governments choose higher
deterrence levels and experience less hostage taking at home. Once deterrence is decided, the
terrorists must then choose whether or not to attack. The probability of an attack, , depends on
whether the terrorists expected payoffs from a hostage-taking attack are positive.4 If hostages
are apprehended (i.e., logistical success occurs), then the government must decide whether or not
to capitulate to terrorists demands, where p is the likelihood of government capitulation. The
12
probability of a hostage-taking incident increases with the likelihood of a logistical success, the
probability of a government capitulation (if hostages are secured), and the benefit of a successful
operation, m. In contrast, the likelihood of an attack decreases with smaller terrorist payoffs
!
associated with logistical and negotiating failures i.e., smaller |c| and m.
The conventional wisdom for the never-to-capitulate policy hinges on at least four
implicit assumptions: (i) the governments deterrence is sufficient to stop all attacks; (ii) the
governments pledge is fully credible to all would-be hostage takers; (iii) the terrorists gains
from hostage taking only derives from the fulfillment of their demands; and (iv) there is no
uncertainty concerning the payoffs. Each of these assumptions may not hold in practice.
Deterrence will not stop all attacks if the terrorists perceive that there is a positive expected
payoff from taking hostages.5 Even if the governments pledge is believed by the terrorists (i.e.,
!
p = 0), conditions on m exists, so that the terrorists can derive a positive gain from securing
hostages when getting no concessions.6 This may arise when media exposure from holding the
hostages is sufficient reward in itself. If, however, the governments pledge is not completely
credible (i.e., p > 0) owing to past concessions, then the terrorists expected payoff is greater than
in the case of a credible governmental pledge, and so an attack becomes more imminent.7 When
a terrorist group is sufficiently fanatical that it views failure as having a positive payoff (i.e.,
!
m > c > 0), then the expected payoff is always positive even when = 1 and deterrence is
insufficient to make failure a certainty.

At the endpoints of the game, the payoffs may themselves be uncertain. In this regard,
we focus on the payoffs to government from the four possible outcomes to the game. With no
attack, the government incurs only the cost of deterrence. If an attack ensues but fails (i.e., no
hostages are taken), then the government incurs the cost of a (> 0) in addition to deterrence
expense; if, however, an attack succeeds, then the government experiences an added cost of h for
13
capitulating and n for not capitulating. The game is more interesting (and realistic) by allowing
either h or n, or both to be uncertain. When, instead, h and n are known beforehand, the
governments response would be to not capitulate provided that h > n. In the latter case,
conventional wisdom applies. Next, suppose that n is a random variable, which may assume a
large value for some hostages (e.g., a soldier or member of parliament). The government is now
guided by comparing h with the expected value of n, and then choosing the smallest, which may
involve conceding to terrorist demands (e.g., the Israeli release of 1,150 Arab prisoners in a
negotiated swap for three Israeli soldiers in May 1985)8 when the expected value of n exceeds h.
For the scenario when both h and n are random, the choice then hinges on choosing the
negotiation response that minimizes the expected cost. A precommitment strategy to never
concede to hostage takers may be time inconsistent when a government later discovers that the
cost of holding firm is too high owing to cost randomness. Although the government has every
intention to fulfill its pledge, its inability to deter all incidents and the terrorists ability to capture
the right hostage means that a government may, at times, renege on its pledge.
The game representation can be made more realistic by allowing multiple periods and
reputation costs. A government concession in one period to hostage takers makes terrorists raise
their belief about future concessions. As p increases for future periods, more hostages will be
taken, so that there is an added cost to conceding in any period. This cost is denoted by R for
loss of reputation, and results in capitulation costs to the government, becoming h + R + D() in
Figure 4. Even when reputation cost is included, conceding may not be eliminated unless h + R
exceeds n for all realizations of n. Such a scenario may be achieved through rules e.g., a
constitutional amendment that imposes sufficiently severe punishment to eliminate any
discretion of government negotiators.
The game can be made still more realistic by including additional sources of uncertainty
14
in terms of the terrorists payoffs. Hostage-taking incidents involve asymmetric information and
uncertainty on the part of both terrorists and governments.9 The beauty of game theory is that it
permits the evaluation of policies while accounting for uncertainty and strategic interactions of
opposing interests. In so doing, easy fixes may not be so straightforward.
Game Theory and Governmental Responses

We have already discussed the transference externality when terrorists target two
different countries and each independently chooses a level of deterrence that fails to account for
associated external cost/benefit. External costs are present when deterrence at home displaces
the attack abroad, while external benefits are relevant when deterrence at home either protects
foreigners or reduces the level of attacks globally. Depending on the opposing external effects,
and there may be others not listed, there may result too much or too little deterrence (Sandler and
Lapan, 1998). The overdeterrence/underdeterrence problem is heightened when a terrorist
network (e.g., al-Qaida) operates in upwards of 60 countries and stages their attacks worldwide
(US Department of State, 2001). Underdeterrence is particularly acute in countries sympathetic
to a groups grievances when the group focuses their attack on foreigners. As the number of
potential targets increase, transference efforts may be especially large. By forming a global
network, terrorists limit the effectiveness of countries efforts to thwart terrorism as externalities
are maximized through countries uncoordinated decisions. Terrorists will naturally seek out the
weakest link i.e., the country with the least security for the venue for their next attack. To
address these weaknesses, prime targets, such as the United States, have instituted programs to
assist such weakest-link countries in bolstering their counterterrorist capabilities. In fact, this
assistance is another of the four pillars of US antiterrorism policy (US Department of State,
2001; Mavesti, 2001). Ironically, US efforts to induce other countries to secure their airports and
15
public places make the United States a more attractive target, as 11 September sadly
demonstrated.
If the terrorist networking advantage is to be countered, then targeted nations must learn
to coordinate their own efforts at counterterrorism. This poses a special problem because nations
are loathed to sacrifice their autonomy over security matters to a supranational collective. With
this in mind, terrorist experts have often called for piecemeal policy where intelligence is shared
but not deterrence decisions (e.g., Kupperman, 1987, p. 577; Wilkinson, 1987). Such piecemeal
responses may be inadvisable when the strategic incentives are taken into account. Suppose that
a terrorist network targets three countries, each of which are engaged in overdeterrence to
transfer the attack abroad. Further suppose that intelligence allows the targeted countries to
better judge the marginal effectiveness of diverting attacks by revealing the terrorists preference
for alternative targets. As these nations acquire this information, they become better adept at
diverting attacks, thereby augmenting the negative transference externality. The net impact of
this information sharing may be to heighten the transference race without providing more
security, so that the added deterrence cost simply makes the three countries worse off. This
results in a second-best outcome in which the change in one policy parameter (i.e., increased
information sharing) which would, under full cooperation, improve efficiency, may worsen
inefficiency when a second policy (i.e., coordination of deterrence) is not chosen optimally. A
similar second-best scenario may characterize other partial responses e.g., greater actions to
apprehend terrorists without coordinating efforts to increase punishments. The failure to
coordinate retaliatory responses until 7 October 2001 is another piecemeal response that may
have led to inefficiencies. Thus, the application of game theory again raises policy concerns
previously ignored in the terrorism literature.
16
Building a Coalition against Terrorism
Actions to coordinate retaliation against either a terrorist organization or a state-sponsor
of terrorism has typically been characterized as a Prisoners Dilemma (e.g., Lee, 1988) with all
countries playing their dominant strategy to sit back and do nothing. This representation follows
because a countrys own cost of retaliating is often greater than its perceived benefit (Sandler,
1997, p. 133). That is, the cost is private to the retaliator but the benefit is purely public
nonexcludable and nonrival to potential targeted countries. Perceived retaliation cost may be
higher than the retaliators derived benefit, since the retaliator often attracts subsequent terrorist
attacks as protests for its actions (Brophy-Baermann and Conybeare, 1994; Enders and Sandler,
1993). In the past, a targeted country responds to maintain its political legitimacy in a liberal
democracy (Wilkinson, 1986) i.e., to be viewed as trying to protect lives and property. For a
targeted country, these political benefits may offset the net negative economic gains associated
with retaliation,10 so that it acts alone. Countries not directly in the terrorists cross hairs will
only weigh the net negative economic benefits and free ride.
The forging of an alliance to wage war on terrorism in Afghanistan after 11 September
2001 appears to abide by a different underlying game form than the Prisoners Dilemma for
select countries that have participated in the retaliatory response against the Taliban and Osama
bin Laden. We shall focus on the two most ardent participants the United States and the
United Kingdom. In Figure 5, we represent an underlying retaliation game in ordinal form,
where payoffs are rank ordered from highest (4) to lowest (1). The payoffs for the row player
the US are listed first, followed by those of the column player the UK in each of the four
strategic combinations. The ordinal payoffs displayed indicate that the highest payoffs come
from these two countries jointly retaliating, followed by the next-largest payoff for free riding
when the other country retaliates. The worst payoff corresponds to retaliating on ones own,
17
followed by the second-worst payoff when neither country retaliates. This game differs from the
standard Prisoners Dilemma by having the ordinal payoffs of the 3s and 4s switched. That is,
the heinous nature of the 11 September attacks and its human toll on American and British
citizens at the World Trade Center increased the ordinal payoff for joint retaliation and decrease
this payoff from free riding, as compared with earlier terrorist incidents, including the downing
of Pan Am Flight 103 over Lockerbie, Scotland on 21 December 1988.11
For the assurance game displayed in Figure 5, there is no dominant strategy that gives
higher payoffs no matter what the other country does, but there are two pure-strategy Nash
equilibria, where either both countries retaliate or both do nothing. In this scenario, an alliance
can be forged provided that one country leads and begins to retaliate, which was the role that the
United States assumed. Other countries that have come along once the retaliatory strikes were
well underway were Japan, Germany, and Italy. US leadership, coupled with initially successful
operations, brought these others into the alliance by more than name only. Still other alliance
members would only go along with US actions through private inducements that made being an
ally a dominant strategy.
Rational-Choice Representations
Beginning with the Landes (1978) study of skyjackings, economists characterize
terrorists as rational actors who maximize expected utility or net payoffs subject to constraints.
Arguments in these constraints may consist of terrorists resource endowments or actions taken
by the authorities to thwart terrorism. In the Landes (1978) model, potential hijackers will
engage in a hijacking provided that the associated expected utility exceeds other nonskyjacking
means of furthering their goals. Based on this utility comparison, Landes (1978) specifies an
offense (i.e., number of skyjackings) function, whose independent variables include the
18
hijackers subjective estimate of the likelihood of apprehension, their estimate of the conditional
probability of imprisonment (if apprehended), and other actions by the authorities (e.g., the
presence of US sky marshals on flights). Using data on US hijackings for 1961-76, Landes
demonstrates that greater prison sentences and enhanced likelihood of apprehension are
significant deterrents. He also indicates that the installation of metal detectors on 5 January 1973
led to between 41 and 50 fewer hijackings in the United States during 1973-76.
In a subsequent analysis, Enders and Sandler (1993) examine a wide range of policy
interventions, including metal detectors, fortification of embassies, retaliatory raids, and the
Reagan get-tough-on-terrorists laws. The theoretical model for the terrorists that underlies
their study is analogous to the consumer-choice model. Terrorists maximize utility or expected
utility derived from the consumption of basic commodities, produced from terrorist and
nonterrorist activities. For example, al-Qaida terrorists may gain utility from a reduced political
resolve on the part of the United States to remain in the Persian Gulf as Americans lose their
lives in terrorist attacks (e.g., the destruction of the Al Khubar Towers housing US airmen and
others on 25 June 1996 near Dhahran, Saudi Arabia). This weakening of US resolve is the basic
commodity that can be produced with a number of alternative attack modes. Substitution
possibilities among terrorist tactics arise when alternative modes of operations produce the same
basic commodities (e.g., political instability, media attention) in varying amounts. Substitution
is enhanced when attack modes possess closely related outcomes and are logistically similar.
This is clearly the case for hijackings and other kinds of hostage events. Complementarity
results when combinations of attack modes are required to produce one or more basic
commodities. When threats follow real attacks, both actions assume a heightened effectiveness
and are then complementary.
To produce these basic commodities, a terrorist group must choose between nonterrorist
19
and terrorist activities, while being constrained by resources. In the latter choice, terrorists must
further choose between different modes of terrorist attacks based on the perceived prices
associated with alternative operations. Choices are many and include the intended lethality of
the act, its country of location, and whom or what to target. The expenditure on any activity
consists of the activitys per-unit price times the activitys level. Each mode of operation has a
per-unit price that includes the value of time, resources, and anticipated risk to accomplish the
act. The securing and maintenance of a kidnapping victim in a hidden location is logistically
more complex and requires more resources than leaving a small bomb in a trash bin in a railroad
station, so that the former has a greater per-unit price. In choosing a venue, the price is
anticipated to differ based on security measures taken by the authorities, so that a country with
more porous borders will be the staging ground for attacks against targets from other more
secure countries. The prices confronting the terrorists for each tactic are determined, in large
part, by the governments allocation of resources to thwart various acts of terrorism. If, for
example, embassies are fortified, then attacks against embassy personnel and property within the
missions ground become more costly for the terrorists i.e., there is a rise in the price of such
attacks. Similarly, metal detectors in airports increase the relative price of skyjackings as
compared with other kinds of terrorist acts, including kidnappings.
Government policies aimed at a single type of terrorist event (e.g., the installation of
bomb-sniffing equipment in airports) adversely changes its relative price and results in a
substitution into now less expense modes of attack. Thus, Landes (1978) measure of the
success of metal detectors, in terms of fewer skyjackings, does not go far enough, because the
application of this technology may have induced a large number of other kinds of events.
Similarly, to judge the success of embassy fortification, a researcher must also examine
assassinations and other attacks against embassy personnel once outside of the compound.
20
To account for these substitutions, Enders and Sandler (1993) apply vector autoregression
(VAR) analysis to allow for the potential interactions among various terrorist time series (e.g.,
skyjackings and other hostage events) in response to government policies. They find that metal
detectors decreased skyjackings and threats, but increased other kinds of hostage incidents, not
protected by detectors. The trade-off between events were about one for one (also see Enders,
Sandler, and Cauley, 1990; Im, Cauley, and Sandler, 1987). Both substitutions and
complementarities are uncovered. Fortification of US embassies and missions reduced attacks
against such installations, but were tied to a disturbing increase in assassinations of officials and
military personnel outside of protected compounds. In addition, Enders and Sandler (1993)
establish that the US retaliatory raid against Libya on April 1986 (for its suspected involvement
in La Belle Discothque in West Berlin on 4 April 1986) was associated with an immediate
increase in terrorist attacks against US and UK interests. This increase was shortly followed by a
temporary lull as terrorists built up depleted resources. Apparently, the raid caused terrorists to
intertemporally substitute attacks planned for the future into the present to protest the retaliation.
Within a relatively few quarters, terrorist attacks resumed the same mean number of events.12
There are a number of ways to institute antiterrorist policies that address these likely
substitutions and complementarities. First, the government must make the terrorists substitute
into less harmful events. Second, the government must go after the terrorists resource
endowment (i.e., its finances, its leadership, its membership) if an overall decrease in terrorism is
to follow. Efforts to infiltrate groups or to freeze terrorist finances have this consequence.
Third, the government must simultaneously target a wide range of terrorist attack modes, so that
the overall rise in the prices of terrorist attacks becomes analogous to a decrease in resources.
Success in raising the price of all modes of terrorist attacks would induce terrorists to shift into
legal protests and other nonterrorist actions to air grievances. Based on the above, we can
21
conclude that a reliance on technological barriers merely causes a substitution into other attack
modes in the short run. In the long term, terrorists will develop ingenuous countermeasures (i.e.,
plastic guns, bottles of flammable liquid) to circumvent the technology. Thus, there is a dynamic
strategic interaction present, where authorities must be ever vigilant to be improving the
technology by anticipating ways of circumventing such barriers. This vigilance must lead to
periodic upgrades in the technology prior to the terrorists exposing the technologys weakness
through a successful attack. Unfortunately, authorities have been reactive in practice by only
responding after a technological barriers weakness has been exploited, so that the public
remains vulnerable until a new technological fix is found and installed.
Other Kinds of Substitutions

Substitution effects abound in the study of terrorism and involve not only actions of the
terrorists, as described above, but also actions of the targets. For targets, the economic literature
addresses two kinds of substitutions. First, there are studies that examine the tourists choice of
vacation spot based on the perceived threat of terrorism and other costs. An alteration in travel
risks, arising from increased terrorist incidents in a country, raises the price of a holiday there in
comparison to other vacation venues, not confronted with terrorism. In a study of Spain, Enders
and Sandler (1991) employ VAR analysis to demonstrate that a typical transnational terrorist
incident is estimated as scaring away just over 140,000 tourists when all monthly impacts are
combined. Companion studies by Enders, Sandler, and Parise (1992) and Drakos and Kutan
(2001) establish and quantify terrorism-induced substitutions in tourism for Greece, Austria,
Italy, Turkey, Israel, and other terrorism-ridden countries. Countries, like Greece, that have not
addressed transnational terrorist attacks directed at foreigners lose significant foreign-exchange
earnings as a consequence. The cost of terrorism comes in many forms.
22
Second, target-based substitutions involve foreign direct investment (FDI). Investors
decide where to invest based on their perceived economic risks, political risks, and monetary
returns. An increase in transnational terrorism directed at FDI (e.g., attacks on Euskadi ta
Askatasuna (ETA) in the Basque region of Spain) is sure to divert such investment. Enders and
Sandler (1996) show that an average years worth of terrorism reduced net FDI in Spain by
13.5 percent annually, and it reduced net FDI in Greece by 11.9 percent annually. These
reductions translated into declines in real net FDI of $488.9 million and $383.5 million,
respectively, or the equivalent of 7.6 percent and 34.8 percent of annual gross fixed capital
formation in Spain and Greece. Transnational terrorism displayed significant economic cost, not
counting the billions spent on barriers and deterrence.
Toward a Benefit-Cost Analysis of Terrorist-Thwarting Policies

As a future research project, economists should assess the benefits and cost of specific
policies to thwart terrorism. Such an exercise has not been adequately done and poses some real
challenges. The cost side is much easier than the benefit side for measurement purposes since
figures are available in, say, the United States as to what is paid to fortify our embassies and
missions, or to guard US airports. Consider the cost associated with airport security. To the cost
of guards and screening equipment must be added the value of lost time as travelers are screened
at US airports.
On the benefit side, calculations are less transparent and more cleverness is needed on
behalf of the researcher. One way to estimate a portion of this benefit would be to compute the
reduced loss of life attributable to airport security measures i.e., fewer people killed in
skyjackings. If the net number of such lives saved, after adjusting for substitutions into other
23
life-threatening terrorist actions, can be measured, then the average value of a statistical life
can be applied to translate these lives into a monetary figure. To this figure, a researcher must
also compute and add the reduced losses in property values (i.e., from destroyed planes)
attributable to the fewer hijackings. In addition, a portion of the value of net air travel revenues
must be considered as a benefit arising from a heightened sense of security stemming from
security upgrades. The events of 11 September clearly underscore that there is a cost to a breach
in airport security as the public loses its confidence in air travel. Any of these components are
fraught with measurement difficulties, because there may be other intervening factors at work
e.g., air travel was already in a slump prior to 11 September.
Every policy to thwart terrorism would entail its own stream of benefits and costs.
Invariably, the benefit calculations are problematic. The US-led retaliation against al-Qaida and
the Taliban in Afghanistan has well-defined costs in terms of deployed soldiers, ordnance,
diplomacy, and side payments to allies. But the true savings or benefits from fewer future acts
of terrorism, in terms of lives and property saved, is so much more difficult to calculate. Timeseries techniques, engineered by Enders and Sandler to measure losses to tourism or to FDI from
terrorism, can be utilized following the retaliation to roughly estimate the decline in terrorist
incidents and their economic value.
Concluding Remarks
Although economic methods have enlightened the public on a number of issues
concerning transnational terrorism, not addressed by the political science literature, there are
many other issues to analyze. For instance, there is a need for applying more dynamic game
methods i.e., differential game theory if the waxing and waning of terrorist organizations
(e.g., Red Brigades, Red Army Faction) are to be understood. Clearly, past successes and
24
failures determine the size of these groups over time. The terrorists try to increase their
organizations size through enhanced resources, successful operations, and recruitment, while the
government tries to limit the groups size through raids, intelligence, group infiltration, and
actions to thwart successes. This dynamic strategic interaction needs to be modeled and
empirically tested. In addition, researchers must better assess the role of information and
intelligence on behalf of the terrorists and the authorities. Given how little governments really
know about the strength of the terrorists that they confront e.g., the US government has almost
no clue about the size of al-Qaida,13 asymmetric information characterizes efforts to thwart
terrorism. Similarly, the terrorists are ill-informed about the resolve of the government and the
amount of resources that it is willing to assign to curbing terrorism. Additionally, there is a need
to model terrorist campaigns i.e., the choice of the sequence and composition of attacks used
by terrorists. As researchers better understand these choices, more effective policy responses can
be devised that adjust for the strategic interaction.
25
Footnotes
1. Since 1973, the 17 November group has engaged in over 140 attacks and 22
assassinations yet no member has been brought to justice (Wilkinson, 2001, p. 54).
2. In fact, there is reasonable evidence to support the claim that each of the incident
series is stationary. Using an augmented Dickey-Fuller unit-root test, we can reject the null
hypothesis of a unit-root in all series, but that of threats and hoaxes, at the .05 level. For this
latter series, we can reject the null of a unit-root at the .10 level.
3. We report the proportion of the variance explained by the frequencies in the interval
[1, 0.15T/2]. Since we are somewhat skeptical of the fitted polynomial trends, we also obtained
results using only demeaned data. These results are very similar to those discussed below.
!
4. If c < c* = [(1 ) ] [ pm + (1 p)m], then the terrorists are better off attacking even
!
though they receive c for a logistical failure and (1 )[ pm + (1 p )m] for a logistical success.
We have c < c* when the expected payoff from a logistical success, which accounts for
negotiation success or failure, exceeds the expected payoff from a logistical failure. In Figure 4,
corresponds to
c*
f (c)dc, where f(c) is the probability density for c which reflects the
unknown resolve of the terrorists.

!
5. The terrorists perceived net expected payoff equals: (1 ) [ pm + (1 p )m] c.
!
6. The condition is that (1 )m > c.
!
7. When p > 0, expected benefits increase by (1 )( pm pm) compared with the p = 0
!
case. A reasonable assumption is that m > m, so that winning concessions is better than not
gaining concessions.
8. The Arab prisoners released included Kozo Okomato, a Japanese Red Army Faction
member, who was the sole surviving terrorist in the Lod Airport massacre of 1972, which left 27
26
people dead and 78 injured.
9. On asymmetric information models of terrorism, see Lapan and Sandler (1993) and
Overgaard (1994).
10. Economic benefit refers to the direct benefit derived from retaliation, while
economic cost refers to the expenditure of resources to carry out the retaliation and other
subsequent losses associated with the retaliation. We use the term economic benefit to
distinguish it from political benefit stemming from maintaining legitimacy.
11. Britain lost the second greatest number of citizens of any country at the World Trade
Center. Despite Pan Am 103 flying out of Heathrow Airport and crashing in the United
Kingdom (Lockerbie, Scotland), Britain lost relatively few of its citizens in this incident.
12. Analogous results are found in Brophy-Baermann and Conybeare (1994) for
retaliations by Israel against Palestinian terrorists.
13. In the latest Patterns of Global Terrorism, al-Qaida strengths is given as may have
several hundred to several thousand members (US Department of State, 2001, p. 69).
27
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Table 1
Transnational Terrorism: Events 1968-2000
Year
Number of Events
Deaths
Wounded
Attacks on US Interests
2000
423
405
791
200
1999
392
233
706
169
1998
273
741
5,952
111
1997
304
221
693
123
1996
296
314
2,652
73
1995
440
163
6,291
90
1994
322
314
663
66
1993
431
109
1,393
88
1992
363
93
636
142
1991
565
102
233
308
1990
437
200
675
197
1989
375
193
397
193
1988
605
407
1,131
185
1987
665
612
2,272
149
1986
612
604
1,717
204
1985
635
825
1,217
170
1984
565
312
967
133
1983
497
637
1,267
199
1982
487
128
755
208
1981
489
168
804
159
1980
499
507
1,062
169
1979
434
697
542
157
1978
530
435
629
215
1977
419
230
404
158
1976
457
409
806
164
1975
382
266
516
139
1974
394
311
879
151
1973
345
121
199
152
1972
558
151
390
177
1971
264
36
225
190
1970
309
127
209
202
1969
193
56
190
110
1968
125
34
207
57
Source: US Department of State, Patterns of Global Terrorism (1988-2001) and tables provided
to Todd Sandler in 1988 by the US Department of State, Office of the Ambassador at Large for
Counterterrorism.
Table 2
Trend and Other Statistical Properties of Transnational Terrorist Incidents
Constanta
5.901
(3.832)
Time
0.219
(4.093)
(Time)2
0.001
(3.202)
Bombings
34.449
(4.442)
1.139
(4.230)
0.010
(5.021)
Threats & Hoaxes
8.595
(2.540)
0.276
(1.256)
0.010
(2.572)
Assassinations
1.521
(1.229)
0.400
(9.299)
Casualties
9.726
(2.441)
0.579
(4.497)
Incident Type
Hostage taking
All Events
(Time)3
Fstatb
13.11
[0.000]
Variance
32.223
Percentc
0.278
15.87
[0.000]
842.470
0.314
11.34
[0.000]
87.170
0.247
0.003
(8.830)
43.49
[0.000]
21.472
0.411
0.004
(4.635)
10.74
[0.000]
119.479
0.527
0.000
(3.340)
41.689
2.435
0.019
30.79
1335.560
0.252
(4.270)
(7.185)
(7.743)
[0.000]
a
t-ratios are in parentheses.
b
Prob values are in brackets under the F-statistics.
c
Proportion of variance of the detrended, fitted-polynomial series that is accounted for by the lowest
15 percent of the frequencies (i.e., the longest cycles).
2000
1999
1997
1996
1994
1993
1991
1990
1988
1987
1985
1984
1982
1981
1979
1978
1976
300
1975
1973
1972
1970
Figure 1
All Incidents and Bombings
350
Bombings
All
250
200
150
100
50
2000
1999
1997
1996
1994
1993
1991
1990
1988
1987
1985
1984
1982
1981
1979
1978
1976
35
1975
1973
1972
1970
Figure 2
Assassinations and Hostage Incidents
Hostage Incidents
Assassinations
30
25
20
15
10
2000
1999
1997
1996
1994
1993
1991
1990
1988
1987
1985
1984
1982
1981
1979
1978
1976
1975
1973
1972
1970
Percent
Figure 3
Proportion of Incidents with Casualties
80
70
60
50
40
30
20
10
Figure 4
Game Theory for Hostage Event
Government chooses deterrence
D(q)
Terrorists decide whether or not to attack
ck
At
A W
1
ck
ta
W
es
c
uc
lS
ica q
st 1 -
i
og
st
l
ica
gi
re
lu
ai
Lo
D(q)
0
Government response
i
ap
tc
no p
s 1-
it
te
la
tu
p
Ca
te
a
ul
oe
a + D(q)
-c
No
tta
h + D(q)
m
n + D(q)
~
m
Figure 5
Ordinal Game Matrix for Retaliation
UK
Retaliate
Do Nothing
Retaliate
4, 4
1, 3
Do Nothing
3, 1
2, 2
US
WHAT DO WE KNOW ABOUT THE SUBSTITUTION EFFECT IN TRANSNATIONAL

TERRORISM?
by
Walter Enders*
wenders@cba.ua.edu
Todd Sandler
tsandler@usc.edu
April 2002
*Walter Enders is the Lee Bidgood Chair of Economics and Finance in the School of Business at
of International Relations and Economics. He is a member of the School of International
Relations and the Department of Economics at the University of Southern California. Sandler
California to update the ITERATE data for 1999-2000.
The success of the terrorist attacks on the World Trade Center and the Pentagon on 11
September 2001 (henceforth, 9/11) has resulted in profound economic and social consequences
for the United States. In addition to the loss of life and property, total costs of the attacks are
staggering. With the economy already on the brink of recession, the unemployment rate rose by
almost 1%.1 Some sectors bore the brunt of the loss in business and consumer confidence. Wall
Street closed for a week; on its re-opening, various stock market indices fell substantially and
investment funds seemed to dry up. The airline industry was temporarily shut down, the tourism
industry was especially hard-hit, and several airlines never recovered. The opportunistic anthrax
attacks that followed caused major disruptions of the mail.
The worldwide response to fighting terrorism has been equally dramatic. The U.S.-led
coalition known as Operation Enduring Freedom quickly achieved its aim of eliminating the
Taliban regime in Afghanistan. In total, seventeen nations contributed more than 16,500 troops
to the initial operation. Other efforts included the enhancement of airport security and directives
from nearly 150 countries to freeze terrorist assets totaling at least $104.8.
Within the United States, President Bush created the Office of Homeland Security and
the National Defense Authorization Act (S. 1438, 8 December 2001). This Act earmarked funds
for extending the war on terrorism, which includes countermeasures against potential biological
and chemical attacks. Future years promise even greater anti-terrorism measures. President
Bushs proposed budget for 2003 directs $37.7 billion to homeland security (an $18.2 billion
increase over 2002). In particular, the budget proposal includes $11 billion for border security,
$6 billion to defend against bioterrorism, $3.5 billion (a 1,000-percent increase) for police,
firefighters and Emergency Medical Teams, and $700 million to coordinate the antiterrorism
All data used in this section were obtained from the official website of the President of the United States:
www.whitehouse.gov.
2
measures of the various branches of government.
Undoubtedly, a massive anti-terrorist campaign will reduce the overall level of terrorism.
Nevertheless, an important strategic question remains, since some anti-terrorism policies are apt
to be more successful than others. As surveyed in this paper, economists and political scientists
have investigated the effectiveness of alternative policy responses (e.g., toughening punishments,
retaliatory raids, installing technological barriers). Each anti-terrorism policy can influence a
terrorist groups choice of operations by either affecting their resources or the relative costliness
of different kinds of attacks. Such policies can have an income effect or substitution effect
or both. The income effect involves the overall level of available resources e.g., freezing
terrorists assets reduces their war chest and their overall ability to conduct a campaign of
terror. If a government action increases the resource outlays necessary to undertake a particular
type of operation, then there is a motive to substitute into some less costly operation that
achieves a similar outcome at less cost. For example, the installation of screening devices in US
airports in January 1973 made skyjackings more difficult, thus encouraging terrorists to
substitute into other kinds of hostage missions or to stage a skyjacking from an airport outside of
the United States.
Unlike the two examples above, the income and substitution effects of an anti-terrorism
policy are often interrelated. For example, the seizure of a cache of explosive devices has a clear
income effect (since resources decline) and a substitution effect (since terrorists are less likely to
stage incidents that rely on explosives). The essential point is that the overall effectiveness of
any anti-terrorism policy depends on the direct and indirect effects that arise through various
substitutions. The purpose of this chapter is to provide a careful examination of the terrorists
decision-making process, so as to understand and predict the likely responses.
1. Transnational Terrorism
3
Since the events of 9/11, the popular press has run articles arguing over the precise
meaning of terrorism.2 We define terrorism as 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 event, no matter how brutal, is not a terrorist incident unless it involves the
presence of a political objective. Incidents that have no specific political motive are criminal
rather than terrorist acts: a barroom shooting is a criminal act, while the assassination of an
ambassador to coerce political change is a terrorist act. Another fundamental ingredient in the
definition is the creation of widespread intimidation or fear. Unlike warfare, where the aim is to
destroy opposing combatants, terrorists also seek to affect those not immediately involved with
the political decision-making process. The 9/11 attack on the World Trade Center clearly fits
this pattern.
As part of the attempt to create a general climate of intimidation, terrorists strike at a
variety of targets using attack modes ranging from skyjackings to simple threats and hoaxes.
The mix of operations makes it difficult for the authorities to predict the nature and location of
the next incident. From the perspective of the authorities, terrorist incidents appear to be
random, so that society must expend relatively large amounts of resources to protect against all
forms of potential attacks.
Most terrorist events directed against the United States do not occur on U.S. soil. The
kidnapping and murder of reporter David Pearl in Pakistan, the destruction of the Al Khubar
Towers housing US airmen in June 1996 near Dhahran, Saudi Arabia, and the bombs destroying
the U.S. embassies in Kenya and Tanzania in August 1998 are but three gruesome examples of
transnational terrorism. Terrorism is transnational when an incident in one country involves
2
Carr (2002) raises a number of issues concerning the appropriate definition of terrorism. Slate
(http://slate.msn.com//?id=2062267) contains a discussion of the premise that terrorism necessitates that the victims
be non-combatants.
4
perpetrators, victims, targets, institutions, governments, or citizens of another country.
Obviously, the four skyjackings on 9/11 constitute transnational terrorist attacks since the events
were staged by individuals who crossed into the United States from abroad and because victims
came from many countries. However, the bombing of the Murrah Federal Building in Oklahoma
City by Timothy McVeigh in April 1995 was not a transnational terrorist incident.
From the late 1960s until the late 1980s, transnational terrorism was primarily motivated
by nationalism, separatism, Marxist ideology, anti-racism, nihilism, and the desire for economic
equality (Wilkinson 1986). In the 1990s, a driving motivation of terrorism has changed with "the
emergence of either obscure, idiosyncratic millennium movements" or religious-based groups
(Hoffman 1997, 2; 1998, 185-99). When religion provides the dominant objective of a group
that employs terrorist tactics, it is identified as a religious terrorist group (e.g., Hamas, Algerian
Armed Islamic Group (GIA), Hezbollah, Egyptian Gamat al-Islamiya). Since the start of 1980,
Hoffman (1997) reports that the number of religious-based groups has increased as a proportion
of the active terrorist groups: 2 of 64 groups in 1980; 11 of 48 groups in 1992; 16 of 49 groups in
1994; and 25 of 58 groups in 1995. This increase can be attributed to a growth of religious
fundamentalism worldwide, the diffusion of the Islamic revolution from Iran, and the approach
of the millennium. With this motivational change for some terrorists, Hoffman (1997, 1998) and
Juergensmeyer (1997) view the new generation of terrorists as posing a more deadly threat than
earlier groups.
The demise of many leftist groups in the late 1980s and 1990s is attributable to at least
three factors: (i) domestic efforts by some terrorism-prone countries (e.g., France, Germany,
Spain, the United Kingdom) to capture and to bring to justice group members; (ii) reduced state
sponsorship of left-wing groups by East European and Middle Eastern countries (Chalk 1995;
Clutterbuck 1994; Jongman 1992); and (iii) the reduced interest in Marxism following the
5
collapse of many communist regimes. These factors were bolstered by collective initiatives by
the European Union to foster cooperation in terms of extradition, shared intelligence, and
accreditation of foreign diplomats (Chalk 1995; Wilkinson 1992; Zagari 1992). In recent years,
NATO has also begun a program to address collectively the risks posed by transnational
terrorism (Wilcox 1997). Another recent development in terrorism has been the increase in
splinter groups that are less disciplined, often more violent, and more nebulous than the parent
group (Hoffman 1997, 1998). The IRA splinter group responsible for the Omagh bombing in
Northern Ireland on 15 August 1998 is a clear-cut example. They did not follow standard IRA
procedures and issued a warning that herded people nearer to the subsequent blast. Some days
later, the group apologized and ceased operations. If members actions are not constrained, then
a few fanatical individuals can cause great carnage.
The greater prevalence of religious groups has apparently increased the lethality of postCold War terrorism, because such groups view civilians as legitimate targets of a "decadent"
society. Religious groups that declare a Jihad or holy war against another nation consider its
people, not just its officials, as the enemy. Moreover, religious terrorist groups act out of a
desire to satisfy their own goals (e.g., ascend to heaven) rather than to win favor with an external
constituency. Violence may be viewed as a purifying act. Although it is tempting to attribute
the increased casualties per incident, documented below, to better technology available to
terrorists, most of the incidents have not really relied on new technologies. Old-fashioned bombs
were used at Oklahoma City, Nairobi, and most other targets. The difference today is that these
bombs are set to explode where and when maximum carnage will result.
2. The Choice-Theoretic Model of Terrorism
The choice-theoretic model of rational terrorists considers a terrorist group as choosing
how to allocate scarce resources to maximize the expected value of its objective function. The
6
model developed by Landes (1978) considers a potential skyjacker contemplating the forcible
diversion of a commercial aircraft for political purposes. A simplified version of the Landes
model considers three states of the world: there is no skyjacking, the skyjacking is successful,
and the skyjacking fails.
In order to highlight the risky nature of terrorism, we assume that utility in the noskyjacking state is certain; if the terrorist decides not to attempt to undertake the skyjacking,
utility is given by U N. If, however, the skyjacking occurs, the outcome is uncertain. Expected
utility can be represented by:
EU SKY = U S + ( 1 )U F,
(1)
where EU SKY = expected utility if there is a skyjacking;

= skyjackers subjective estimate of the probability of a successful skyjacking;
1 = skyjackers subjective estimate of the probability of a failed skyjacking;
U S = utility if the skyjacking is successful;
U F = utility if the skyjacking fails.
The terrorist will attempt the skyjacking if the expected utility derived from undertaking
the skyjacking exceeds the utility level UN when there is no skyjacking:
U N < EU SKY = U S + ( 1 )U F.
Thus, anything that lowers U N or raises EU SKY increases the probability of a skyjacking.
Landes model is useful for understanding the choice between legal and illegal terrorist
activities. Given that utility from success exceeds utility from a failure [ i.e., U S > U F ], it
follows that an increase in the probability of a success will make it more likely that the
skyjacking will occur. Formally, the change in expected utility from a skyjacking due to a
change in is:
(2)
7
dEU SKY / d = U S U F > 0.
(3)
Hence, if the authorities undertake a policy (such as enhanced airport security) that
reduces the probability of a successful skyjacking (lowering ), the Landes model predicts that
the terrorists will be more likely to forego the skyjacking, owing to the associated reduction in
EU SKY. Policies that lower the utility from a skyjacking failure, such as longer jail sentences,
also reduce the expected utility from skyjackings, thus decreasing the likelihood of such events.
Moreover, policies that limit the utility from success, such as reduced media coverage, also
reduces the number of skyjackings.
Although some Hamas and al-Qaida terrorists engage in suicide missions, the vast
majority of terrorists do not resort to such attacks and respond predictably to security
enhancements and other policy actions. Nevertheless, the model is capable of addressing suicide
attacks. If a terrorist is concerned with living, then U F is likely to be low, thereby inhibiting
EU SKY from exceeding U N the necessary requirement for an attack. A fanatical terrorist, who
does not fear death and may welcome it, has a higher U F, which makes an attack more likely in
(2). Fanaticism brings U F closer to U S in (3); thus the policy effectiveness of lowering the
success probability diminishes. If, for example, U F = U S in (3), then efforts to lower have no
effect on EU SKY. Consequently, policy becomes completely ineffective. Fanatical terrorists
must be apprehended or killed for attacks to stop.
Landes presented two regressions for US skyjackings based on US Federal Aviation
Administrative data on skyjackings for the 1961-1976 period. The first regressed the quarterly
total of skyjackings on the probability of apprehension, the probability of conviction, sentencing,
and other policy efforts. The second regressed the time interval between skyjackings and the
same set of variables. Both regressions found the length of sentence and the probability of
apprehension to be significant deterrents. For most regressions, the probability of conviction
8
was marginally significant. Landes also estimated that between 41 and 50 fewer skyjackings
occurred in the U.S. from the start of 1973 following the installation of metal detectors in US
airports.
More generally, substitutions can be analyzed with a household production function
(HPF) approach for which the utility of a terrorist group is a function of a shared political goal.
The HPF model was first applied to transnational terrorism by Enders and Sandler (1993). Given
the groups budget constraint, this shared goal is produced from a number of basic commodities
that may include both terrorist and non-terrorist activities. To be more specific, basic
commodities may include political instability, media publicity, an atmosphere of fear, or
extortion. Alternative terrorist attack modes can be substitutable if they produce the same basic
commodities. Substitution possibilities are augmented when attack modes are logistically similar
and yield the same basic commodities in nearly identical proportions. An assassination of a key
public official or a skyjacking might be substitutes if they provide a terrorist group with similar
amounts of media attention. Complementarity results when a combination of attack modes is
required to produce one or more basic commodities or when the success of one type of attack
reinforces the effects of a second type of attack. For example, in the wake of 9/11, the anthrax
mailings had an especially demoralizing (complementary) effect on a public already sensitized to
terrorism.
The advantage of the HPF approach is that it allows for substitutions between legal and
illegal activities and for substitutions within the set of illegal terrorist activities. Choices within
the set of terrorist activities are many and include the intended lethality of the act, its country of
location, and whom or what to target (Sandler and Lapan, 1988). In each period, an overall
resource constraint limits the terrorist groups expenditures to a magnitude not exceeding its
monetary and non-monetary resource endowments. The expenditures on any activity consist of
9
the product of the activitys level and its per-unit price. Each terrorist and non-terrorist tactic has
a per-unit price that includes the value of time, the use of personnel, funding and capital
equipment, including weapons. A skyjacking is a high-priced incident because it is logistically
more complex to plan and execute and thus requires more resources than do many other types of
incidents. At the other extreme, threats and hoaxes require few resources and are low-priced
incidents. Nevertheless, such incidents can add to the overall level of fear and intimidation. The
recipients of various powders disguised as anthrax felt the same initial fear and undertook the
same precautions as did the recipients of the real thing.
In addition to such technological considerations, the prices terrorists pay for each tactic
are influenced by anti-terrorism policies. If, for instance, the government were to secure its
embassies or military bases, then attacks against such facilities would become more costly on a
per-unit basis. If, moreover, the government were not at the same time to increase the security
for embassy and military personnel when outside their facilities, then attacks directed at these
individuals (e.g., assassinations) would become relatively cheaper.
The HPF approach yields a number of important predictions concerning the substitution
phenomenon. The critical result is that a government policy that increases the relative price of
one type of terrorist tactic produces a substitution out of the now-more-costly tactic into those
terrorist and non-terrorist activities whose prices are now relatively less costly. If, for example,
embassies are fortified, then attacks against embassy personnel and property within the missions
ground become more costly for the terrorists i.e., there is a rise in the price of such attacks.
Similarly, in choosing a venue, the price is anticipated to differ based on security measures taken
by the authorities; therefore, a country with more porous borders will be the staging ground for
attacks against targets from other, more secure, countries. A further prediction of the model is
that complementary tactics would respond in a similar fashion to relative price changes. For
10
example, assassinations and bombings tend to be substitutes, while bombings and threats are
complementary. Thus, the model predicts that a policy that makes it more costly to obtain
assault weapons (an important input in an assassination) will reduce the number of assassinations
but increase the number of bombings and threats. In contrast, government interventions that
raise the price of all terrorist tactics or that reduce terrorists resources will cause non-terrorist
activities to increase relative to terrorist actions. However, there is no reason to suppose that this
type of policy will induce substitutions among the various attack models.
To be more formal, suppose that a group only uses two kinds of operations hostage
taking (h) and bombings (b). Further, suppose that the per-unit costs of each kind of operation
are Ph and Pb for hostage taking and bombings, respectively. In general, these unit costs will
depend on the level of operations and on the anti-terrorism expenditures of the authorities:
Ph = Ph(h, gh) , Ph h 0and Ph g h 0
(4)
Pb = Pb(b, gb) , Pb b 0and Pb g b 0
(5)
where gh and gb are the governments anti-terrorism expenditures on hostage-takings and

bombings, respectively. 3
Taking as given the governments anti-terrorism expenditures and their own total level of
resources (R), the terrorists choose h and b to maximize their utility
U(h, b),
(6)
subject to:
R = Ph(h, gh) h + Pb(b, gb) b.
(7)
Under the standard assumptions, it is possible to show that hostage taking and bombings
Notice that in our 2-incident example, we abstract from direct substitutability and complementarity. In a more
general setting, we could allow the price of bombings to depend on the number of hostage takings and the price of
hostage-takings to depend on the number of bombings. Moreover, anti-terrorism spending directed towards one type
of incident might be expected to increase the price of the alternative incident types.
11
decrease when the authorities manage to limit the terrorists resource base R. Moreover, actions
by the authorities to increase the unit cost of, say, hostage taking cause terrorists to switch some
operations to the now relatively cheaper bombing events.
A third choice of terrorists involves an intertemporal allocation of resources. Analogous
to other investors, terrorists can invest resources to earn a rate of return, r, per period. When
terrorists want to augment operations, they can cash in some of their invested resources.
Suppose that terrorists have a two-period horizon and must decide terrorist activities today (T0)
and tomorrow (T1) based on resources today (R0) and tomorrow (R1). The intertemporal budget
constraint is:
T1 = R1 + (1 + r)( R0 T0 ),
(8)
where tomorrows terrorism equals tomorrows resource endowment plus (minus) the earnings
on savings (the payments on borrowings) from the initial period. Terrorists maximize an
intertemporal utility function, U (T0 , T1), subject to (8) and, in so doing, decide terrorist activities
over time. Thus, terrorists can react to shocks by augmenting operations not only from curbing
non-terrorist activities, but also through an intertemporal substitution of resources.
Unlike a standard intertemporal optimizing framework, the capital market is not perfect
terrorist groups cannot fully borrow against their expected future income levels. As such, there
may also exist a liquidity constraint. If high-terrorism periods are to be supported by an
intertemporal substitution, it may be difficult for terrorists to maintain a prolonged campaign. As
such, particularly long and intense terrorist campaigns are not as readily sustained as lower levels
of conflict. This prediction may not characterize non-resource-using threats and hoaxes.
We can summarize some of the key predictions and implications of the household
production approach as follows:
12
Substitutions across attack modes: An increase in the probability of success, a decrease
in the relative price, or an increase in the payoff of any one type of attack mode will increase that
type of attack.
Effects of government policies: Government policies aimed at a single type of terrorist
event (e.g., the installation of bomb-sniffing equipment in airports) adversely changes its relative
price and results in a substitution into now less expense modes of attack. Thus, Landes (1978)
measure of the success of metal detectors, in terms of fewer skyjackings, does not go far enough,
because the application of this technology may have induced a large number of other kinds of
events.
Substitutions across countries: A decrease in the probability of success or a reduction in
the payoff in successfully attacking any one country will reduce the number of attacks on that
country. Given their available resources, terrorists wll move planned attacks into similar,
relatively less-protected countries.
Intertemporal Substitutions: High-terrorism states deplete resources and so are followed
by low-terrorism states. Particularly long and intense terrorist campaigns are not as readily
sustained as are lower campaign levels.
3. Evidence of the Substitution Effect
The data we use is constructed from the source files of ITERATE (International
Terrorism: Attributes of Terrorist Events). ITERATE was originally developed by Edward
Mickolus (1982) and has been extended by Mickolus, Sandler, Murdock, and Fleming (1989,
1993) and Fleming (2001). Todd Sandler updated select variables through 1999-2000.
ITERATE uses information from publicly available sources to construct a chronology of
transnational terrorist events. The sources for ITERATE include the Associated Press, United
Press International, Reuters tickers, the Foreign Broadcast Information Service (FBIS) Daily
Reports, and major US newspapers (e.g., the Washington Post, New York Times).
Figure 1 displays the quarterly totals of all transnational terrorist events over the 1968:1 2000:4 period. In contrast to the impression cast by the media, the number of transnational
terrorist incidents has been declining since 1993. Bombings are the favorite mode of operation
13
given year. As is evident from the figure, transnational terrorism displays a number of sharp
peaks and troughs. Some of the fluctuations are due to landmark political events. The jump in
1979 can be attributed to the political ramifications surrounding the takeover of the U.S. embassy
in Tehran (Enders and Sandler, 2000). The spike in 1986 is associated with the U.S. retaliatory
raid against Libya that occurred on 15 April 1986. The latter half of the 1990s represents a
downturn in transnational terrorism due, in large part, to fewer states sponsoring terrorism in the
post-Cold War era (Enders and Sandler, 1999).
Substitutions and religious based terrorism
Despite the decline in overall terrorism, Figures 2 and 3 paint a grim picture. Figure 2
shows the number of individuals KILLED per quarter in all transnational events, and Figure 3
shows the quarterly proportion of incidents with CASUALTIES and the proportion with deaths.
Notice that the values of the KILLED series have generally increased since 1993. Over the
entire sample period, an average of 63 individuals have been killed in each quarter. Beginning in
1993, the average number of deaths has increased to 79 per quarter. This pattern is reinforced by
the data shown in Figure 3. The proportion of incidents with CASUALTIES (the dashed line in
the figure) has remained fairly stable since 1973; however, the proportion of incidents with
deaths has more than doubled over the same period. In fact, the proportion of casualty incidents
without deaths (i.e., those with only wounded individuals) has declined. In recent years, there
has been little difference between the proportion of incidents with casualties and the proportion
of incidents with deaths. The strong impression from Figures 1-3 is that the number of incidents
has been declining while the typical incident is becoming much more lethal. The increase in the
proportion of deadly incidents is consistent with the HPF model. Enders and Sandler (2000)
trace the increase in the severity of a typical terrorist incident to the takeover of the US Embassy
in Tehran. The change in the composition of terrorists from less leftist groups to more religious
14
groups means that terrorists no longer fear death. Moreover, fundamentalist terrorist groups
purposely seek out mass casualties, viewing anyone not with them as a legitimate target. As
such, the typical incident is more likely to involve the death of a terrorist and/or the public.
The assassination series shown in Figure 4 includes both successful and failed
assassinations. As such, the values shown exceed the number of assassinations resulting in
deaths. Notice that the overall pattern of the series follows the pattern of transnational incidents
shown in Figure 1. The disturbing feature is that assassinations are declining while the number
of incidents with deaths is increasing; as such, more KILLED incidents involve non-protected
persons and multiple victims.
Substitutions and government policy interventions
Enders and Sandler (1993, 1995) apply vector autoregression (VAR) analysis to capture
the potential interactions among various terrorist attack modes (e.g., skyjackings and other
hostage events) in response to government policies. They find that the installation of metal
detectors in airports (begun in 1973) decreased skyjackings and threats, but increased other kinds
of hostage incidents, not protected by detectors. Specifically, metal detectors were estimated to
reduce skyjackings and threats and hoaxes by 13 and 9.5 incidents per quarter, respectively.
However, the number of other hostage-taking incidents and assassinations rose by almost 10
incidents per quarter. The measured trade-off between skyjacking and other logistically complex
events was nearly one for one (also see Enders, Sandler, and Cauley, 1990; Im, Cauley, and
Sandler, 1987). In terms of the HPF approach, the installation of metal detectors in US airports
increased the relative price of a skyjacking. Skyjackings fell and so did the complementary
threats and hoaxes. This policy intervention had primarily a substitution effect, because it did
not deplete the resources, knowledge, or wherewithal of the terrorists. Substitutions across
attack modes were also found to be important when the United States fortified its embassies in
15
1985 in accord with public law 98-533. Although direct attacks on embassies were reduced, an
indirect consequence was that the number of political assassinations was increased by 5.4
incidents per quarter.
Intertemporal Substitutions
Both Brophy-Baermann and Conybeare (1994) and Enders and Sandler (1993) examine
the effects of retaliatory raids on intertemporal substitutions. Brophy-Baermann and Conybeare
(1994) find that retaliations by Israel against Palestinian terrorists had no lasting effects on the
level of terrorism. They posit a model such that rational terrorists select a long-run or natural
rate of attacks. The actual level of attacks will differ from the natural level only in the presence
of an unanticipated event. In 1972, Israel conducted nine air raids against PLO camps in Syria in
retaliation for Black Septembers attack on Israeli athletes in the 1972 Munich Olympic games.
These attacks were estimated as increasing the number of PLO attacks against Israel by 9.39
incidents on impact. After three quarters, the PLO attacks were only 0.5 incidents above the
natural rate. Five other Israeli attacks were found to have no long-run statistical effect on PLO
terrorism.
Similarly, Enders and Sandler (1993) establish that the US retaliatory raid against Libya
on April 1986 (for its suspected involvement in the bombing of the La Belle Discothque in
West Berlin on 4 April 1986) was associated with an immediate increase in terrorist attacks
against US and UK interests. The raid involved eighteen US F-111 fighter-bombers being
allowed to take off from UK airbases in Lakenheath and Upper Heyford. The planes were
deployed from UK airbases because European nations, geographically closer to Libya, refused to
allow the United States to use their airbases or their airspace. This endangered the raid since it
forced the US fighters to refuel in midair after flying through the Strait of Gibraltar.
As a result of the raid, terrorist attacks against US and the UK interests were estimated to
16
have increased by 39 incidents. However, the attacks had very little persistence as there was a
temporary lull while terrorists built up depleted resources. In the long run, the mean number of
attacks directed against US and UK interests was found to be unchanged. The evidence seems to
be that retaliatory raids induce terrorists to intertemporally substitute attacks planned for the
future into the present to protest the retaliation. Within a relatively few quarters, terrorist attacks
resumed the same mean number of events.
However, the Israeli raids against the PLO and the US raid against Libya did destroy
some of the terrorists resource base, so that one must wonder why overall terrorism did not
diminish as a result. One answer is that the retaliations were not sufficient to destroy a
significant portion of the terrorists bases or personnel. A second answer is that the raids
actually made it easier for terrorists to recruit new members and to raise funds. A third answer is
that Libya was not responsible for a lot of transnational terrorism.
Enders and Sandler (2002) find additional evidence of intertemporal substitutions using a
threshold autoregressive (TAR) model. The HPF model implies that high-terrorism states are
difficult to maintain if there are important liquidity constraints. In the midst of an intense
terrorist campaign, weapons, funds, and personnel may be depleted. In contrast, a low-terrorism
state can be maintained almost indefinitely; during this time, terrorists can recruit individuals,
raise funds, and acquire weapons. As such, low-terrorism states should be more persistent than
high-terrorism states. Enders and Sandler (2002) let yt denote the number of incidents with
deaths over the 1970:1-1999:4 period and estimate the TAR model (with t-statistics in
parenthesis):
yt = [ 21.53 ] It + [ 7.09 + 0.47yt-1 ] (1 It ),
(23.02)
(3.12) (2.41)
(9)
17
1 if yt 1 18
where: It =
0 if yt 1 < 18.
The threshold model suggests that there is no single long-run equilibrium value for the
number of incidents; instead, there are high- and low-terrorism regimes or states. In the low state
(i.e., when the number of incidents is less than 18), the system gravitates toward 13 incidents per
quarter [7.09 (1.0 0.47) 13]. If, however, the number of incidents exceeds the threshold,
there tends to be an immediate jump to 21.53 incidents. Whenever the number of incidents
exceeds this threshold due to a shock or event, there will be an immediate decline to 21.53
incidents in the subsequent quarter. The high-incident state can be maintained until a shock of
sufficient magnitude causes a switch of regime; however, the number of events in this
heightened state cannot be maintained at more than 21.53 incidents. Insofar as the estimated
standard deviation of is equal to 6.14, the magnitude of a typical shock is likely to cause a regime
switch.
Policy Implications
The findings that substitution effects are important have a number of implications for
government policymaking. Clearly, governments must act to reduce the terrorists resource
endowments (i.e., their finances, leadership, and membership) if an overall decrease in terrorism
is to follow. Efforts to infiltrate and undermine terrorist groups and to freeze their assets have
the consequence of reducing the overall amount of terrorism.
Even some piecemeal policies that cause substitutions by focusing on only part of the
overall terrorism problem may have some net positive impacts. To the extent that the National
Defense Authorization Act leads to a reduction in the likelihood of biological terrorism,
substitutions into other attack modes will occur. The desirability of such policies is that they
may force terrorists to substitute into less harmful events. Anti-terrorist policies can be most
18
effective when the government simultaneously targets a wide range of terrorist attack modes, so
that the overall rise in the prices of terrorist attacks becomes analogous to a decrease in
resources. A government must maintain the resolve to fight terrorism. Terrorists do not have the
same ability as governments to maintain a sustained offensive. A short-lived governmental
effort to fight terrorism will afford the group time to regroup and replenish its resources.
Success in raising the price of all modes of terrorist attacks and/or in reducing terrorists
resources would induce them to shift into legal protests and other nonterrorist actions to air
grievances.
Similarly, the development of technological barriers to thwart terrorism causes a
substitution into other attack modes in the short run. In the long term, terrorists will develop
ingenious countermeasures to circumvent the technology. Immediately after airport vigilance
was increased as a result of 9/11, Richard Reid (aka Tariq Rajah) was discovered on a flight from
Paris to the United States with an explosive device in his shoes. Now that airport security
routinely inspects shoes, plastic guns, electronic jamming equipment, bottles of flammable liquid
or other explosive devices are predicted to be hidden on (or in) the terrorist or in carry-on
luggage. Thus, there are dynamic strategic interactions; authorities must be vigilant to improve
technology by anticipating ways of circumventing current technological barriers. This vigilance
must lead to periodic upgrades in the technology prior to the terrorists exposing the technologys
weakness through a successful attack.
4. What We Do Not Know About the Substitution Effect
testing theories. First, since it relies on public sources such as newspaper accounts, ITERATE
picks up only newsworthy transnational terrorist incidents. However, what is deemed
19
newsworthy changes over time as the public becomes desensitized to terrorism. For example,
ITERATE contains the following incident:
November 5, 1985 GREECE Police discovered a bomb in a suspicious-looking
cloth bag planted between the first and second floors of an Athens building at 8
Xenophon Street. The building housed the offices of Trans World Airlines. Bomb
experts removed the bomb and detonated it without mishap.
Given the increased severity of terrorist events, such an attempted bombing might not be
prominently reported in the newspapers. Thus, ITERATE might suggest that certain types of
terrorist events may have declined simply because they are no longer reported. Of course, this
bias is more likely for threats, hoaxes, and bombings without casualties than for incidents with
deaths. The bias has worsened since mid-1996, when the FBIs Daily Reports became
unavailable to ITERATE coders. Moreover, by relying on newspaper accounts, ITERATE is
better at describing the actions of terrorists than of the authorities. In some instances,
government strategies are revealed and coded in ITERATE. However, anti-terrorism initiatives
may have been undertaken in secret in response to an undisclosed terrorist threat. To circumvent
such limitations of ITERATE, the US government should give proven researchers access to the
unclassified portions of its more inconclusive data sets. The same is true of the RAND-St.
Andrews data set on incidents, which we have tried unsuccessfully to acquire. The true biases in
these data sets can only be ascertained by testing the same hypothesis with alternative data sets.
Clearly, there is much to learn about the substitution effect. Only a portion of the problem
concerns data limitations. Instead of presenting a laundry list of unknowns, we conclude with
three useful directions for future research involving substitutions associated with terrorist
negotiations, terrorist recruitment, and terrorist networks.
Atkinson, Sandler, and Tschirhart (1987), Sandler and Scott (1987), Lapan and Sandler
20
(1988), Selton (1988), Islam and Shahin (1989), Scott (1991), and Shahin and Islam (1992)
examine the effects of negotiating with terrorists. If terrorism becomes successful, the HPF
model predicts that terrorists will devote more of their resources to terrorist activities and that
new terrorist groups will emerge. However, the extent to which a concession to one terrorist
group induces additional terrorist incidents needs to be satisfactorily established.
As posited, the HPF model treats the resources of a group as given. Nevertheless, groups
can obtain resources through publicity. An extremely heinous or highly visible attack may
provide a signal that the responsible group is particularly influential or powerful. Such attacks
may lower recruiting costs so that major campaigns become more sustainable. This means that
the recruiting decisions are not independent of the mode of attack.
The HPF model analyzes the choice-theoretic decision of a single terrorist group. If
terrorists are tied together implicitly through similar hatreds (e.g., of Israel and the United
States), then multiple terrorist groups may simultaneously act as a unified whole. However,
there may be important network externalities or interdependencies not directly captured by the
HPF model of a single group. Since attack modes may be complementary, the actions of one
group may affect the behavior of other groups. For example, attacks by al-Qaida may make it
more desirable for a second terrorist group to also attack the US interests. Moreover, strikes
against terrorists in Afghanistan may make it easier for terrorists elsewhere to recruit individuals
and resources. Such complementarities may induce terrorists worldwide to take on the
appearance of a single group even though they have no direct links with each other.
21
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Retaliation in the Fight Against Terrorism: An Econometric Evaluation. Terrorism
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Social Research.
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Sandler, Todd and John L. Scott. 1987. Terrorist Success in Hostage-Taking Incidents.
Journal of Conflict Resolution. 31:1, pp. 35-53.
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Selten, Reinhard. 1988. A Simple Game Model of Kidnappings, in Reinhard Selten (ed.),
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Shahin, Wassim N. and Muhammad Q. Islam. 1992. Combating Political Hostage-Taking:
An Alternative Approach. Defence Economics. 3:4, pp. 321-7.
Wilcox, Phillip C., Jr. 1997. The Western Alliance and the Challenge of Combating
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Wilkinson, Paul. 1992. The European Response to Terrorism: Retrospect and Prospect.
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Zagari, M. 1992. Combating terrorism: Report to Committee of Legal Affairs and Citizens
Rights of the European Parliament. Terrorism and Political Violence 4, pp. 288-300.
24
Figure 1: All Incidents

350
Quarterly Totals
300
250
200
150
100
50
0
1968
1972
1976
1980
1984
1988
1992
1996
2000
Figure 2: Individuals Killed
Quarterly Totals
250
200
150
100
50
0
1968
1972
1976
1980
1984
1988
1992
1996
2000
25
Figure 3: Proportions of Casualty and Death Incidents

25%
20%
15%
10%
5%
0%
1968
1972
1976
1980
1984
Casualties
1988
1992
1996
2000
1996
2000
Deaths
Figure 4: Assassinations
Quarterly Totals
35
30
25
20
15
10
5
0
1968
1972
1976
1980
1984
1988
1992
AN EVOLUTIONARY GAME APPROACH TO FUNDAMENTALISM AND CONFLICT
by
Daniel G. Arce M. and Todd Sandler*
Final Version: July 2002
Abstract
This paper investigates the evolutionary equilibria of a clash of cultures game where conflict
results from failures to share social power in individual pairings. Members of a general
subpopulation are matched with those of a fundamentalist subpopulation, the latter being more
cohesive and insistent that their identity traits define the norms for, and outcomes of, social,
economic, and political interaction. Simulations of the evolutionary dynamics reveal a tradeoff
between the intolerance of fundamentalism and the likelihood of a takeover. This tradeoff is
reversed if fundamentalism is falsifiable: affording non-fundamentalists the ability to signal
fundamentalist traits produces a bandwagon effect. JEL Classification: D74, C73
*Arce is the Robert D. McCallum Distinguished Professor of Economics & Business, and
Sandler is the Robert R. and Katheryn A. Dockson Professor of International Relations &
Economics. Arces and Sandlers research was funded through the McCallum and Dockson
endowments, respectively. We have profited from comments by Werner Gth, Christoph Engel,
and Timur Kuran on an earlier draft. Comments from the participants at the Wrlitz conference
are also gratefully acknowledged. The authors assume full responsibility for the papers
contents.
AN EVOLUTIONARY GAME APPROACH TO FUNDAMENTALISM AND CONFLICT
1 Introduction
Economists have increasingly turned their attention to the study of conflict since KENNETH
BOULDING [1962] published Conflict and Defense: A General Theory. Although four decades
have now elapsed, BOULDINGS emphasis on equilibrium, strategic interactions, and dynamics
continues to characterize modern treatments of conflicts. Conflict can stem from myriad causes
that include contests over resources, political identity, social control, or grievances. Despite the
end of the Cold War and the superpower confrontation, conflict remains prevalent today as
interstate conflict has given way to intrastate conflicts in the form of civil wars (MURDOCH AND
SANDLER [2002]) and subnational clashes among rivalry interests.
There are a number of theoretical foundations to the study of conflict. One foundation
depends on contests or tournaments in which opposing interests use their resources to vie with
one another for a prize (DIXIT [1987], HIRSHLEIFER [2001], SANDLER [2000a]). This literature is
closely akin to the theory of rent seeking, which involves an agent or collective expending
resources to obtain a return that results in no gain to society i.e., a directly unproductive
activity. For these contests and rent-seeking activities, the conflictual outcome is affected by a
contest success function, which defines appropriative outcome based on the relative inputs of
fighting effort (HIRSHLEIFER [2000]). Another theoretical basis of conflict comes from a generalequilibrium representation, in which a government must allocate resources to stay in power when
confronted by an aggrieved subpopulation, whose resources are being appropriated (GROSSMAN
[1991]). A third foundation for conflict can come from population dynamics, for which
subgroups traits or (dissimilar) values can lead to conflict (HIRSHLEIFER [1998], SKYRMS
[1996]). This third basis of conflict is dependent on evolutionary game theory, which predicts
2
that those displaying the fittest strategy choices, as determined by their resulting payoffs, will
survive, multiply, and characterize the population.
In this paper, we put forward an evolutionary game approach to analyze fundamentalism
and conflict, consistent with the coexistence of both fundamentalist and non-fundamentalist
subpopulations in the same society. The analysis relies on the Nash demand game (NASH
[1953]), played between pairings of individuals drawn from the society, and SKYRMS [1996]
model of evolutionary justice. In pairwise interactions, individuals must bargain over the extent
of social control, for which an equal footing gives each half of the one-unit pie up for
negotiations. One player gains a social dominance over another if his or her take exceeds .5.
The fundamentalist subpopulation is assumed to be sufficiently dogmatic to never settle for a
minority share of social control. We use simulations of the underlying evolutionary dynamics to
show that whether fundamentalist mores characterize social interactions depends upon the
distribution of demands within each subpopulation, and, surprisingly, is inversely related to the
level of fundamentalist intolerance or greediness.
The model is then extended to provide an evolutionary game underpinning to KURANS
[1989] novel and important notion of preference falsification, where individuals present public
preferences that may differ from their true private preferences in order to maximize their wellbeing. Preference falsification is particularly appropriate for dealing with fundamentalists who
provide more favorable terms for those (i.e., fundamentalist or otherwise) who display
fundamentalist traits (e.g., dress, customs, views). The analysis is also descriptive of any regime
e.g., communist or fascist where signaling loyalty is rewarded with preferential treatment that
allows one to fit in. A rich set of population dynamics is shown to derive from either the
initial demand proportions of the constituent subgroups or the intolerance of fundamentalists to
those not signaling fundamentalist characteristics. Under some circumstances, even a relatively
3
small percentage of the general subpopulation abiding by a fundamentalist orientation may be
sufficient to lead to a fundamentalist domination over time if intolerance (i.e., greedy demands)
is sufficiently high. Furthermore, fundamentalist intolerance of non-abiders is now
complementary to this process.
Our analysis is in the spirit of recent political science papers where evolutionary game
theory is offered as a basis for understanding ethnic conflict (GOETZE AND JAMES [2001],
JOHNSON [2001], ROSS [2001], SALTER [2001]). Evolutionary game theory treats conflict as
dynamic, so that those in conflict may change over time depending on the efficacy of strategies
played. Moreover, our model accounts for rewards to those who signal in-group loyalty, a
behavior that is consistent with RUSSELL HARDINS [1995] notion of One for All, where group
identity can promote collective action. Unlike these earlier contributions, we develop an explicit
model to capture evolutionary dynamics. In particular, we represent a dynamic analysis where
subgroups can change in numbers over time and fundamentalists can differentiate their
treatments of others depending on group actions and identity. Finally, our study differs from
BRETON AND DALMAZZONE [2002], for which the emergence of political extremism hinges on
information control and not on evolutionary dynamics.
The remainder of the paper contains five sections. The basic SKYRMS [1996] model is
presented in Section 2 for a single homogeneous population, where conflicts result from
incompatible demands leading to zero payoffs. In Section 3, our evolutionary game depiction of
the clash of cultures extends the Skyrms model to heterogeneous populations consisting of
fundamentalists and a more general subpopulation. Section 4 applies replicator dynamics to
simulate the evolution of ethnopolitical conflicts under alternative population and intolerance
parameters. In Section 5, the analysis permits fundamentalists to make fair demands when
matched with others displaying fundamentalist traits or norms. This behavior not only
4
encourages preference falsification by non-fundamentalists, but also gives rise to interesting
population dynamics. Concluding remarks are drawn in Section 6.
2 The Basic Model

In social interactions, paired agents compete for superiority or control over his or her
counterpart. GIURIATO AND MOLINARI [2002] characterize this control when applied to two rival
groups fundamentalist and the government as the share of political power, which varies
between zero (no power) and one (complete power), over the rival group. GURR [1994] similarly
asserts that such rivalries can ultimately lead to conflict over the distribution of access to state
power, which we extend to the notion of social control. Culturally distinct people in mixed
societies are often locked in rivalries over the way that societal norms are consistent with their
distinct identity traits. A larger amount of social control means that an agent has more say over
norms, income distribution, justice, and other social divisions. Because we focus on population
dynamics among heterogeneous groups, the unit of analysis that drives these dynamics is the
division of social control among paired individuals, drawn from different cultural groups.
If two or more groups disagree about the distribution of social control, then a conflict
ensues. Our focus is on dyads, with the goal of displaying the evolution of conflict in pairwise
interactions among individuals belonging to two groups with distinct identities. Rather than being
a limiting assumption, our concentration on dyadic interactions among members of the general
and fundamentalist subpopulations focuses the analysis where the potential for conflict is the
greatest. Such dyads result in equilibrium characteristics for the competing subpopulations that
are truly the collective result of individual fitness instead of corporate or hierarchically decreed
behavior. By correlating fitness with social control, we adapt a longstanding game the Nash
demand game that SKYRMS [1996] employs to examine issues of social justice. In the Nash
5
demand game, two players must agree on how to divide a 1-unit good. Each player
simultaneously proposes a share for himself or herself. In terms of our context, a players demand
is the minimal amount of social control that he or she is willing to accept. If the proposals are
jointly feasible (their sum is less than or equal to one), then each gets what he or she demands;
otherwise, each receives zero (conflict ensues). Conceptually, this payoff structure allows for
anti-conflicts where both parties receive less than what is available (jointly feasible, but
inefficient demands). This feature gives players a strong incentive to increase their demands as
much as possible without losing compatibility (NASH [1953, 131]). The problem of social control
therefore becomes one of coordinating demands in an efficient manner. A priori there is no
assumption of efficiency, but evolutionary pressure will ultimately lead to efficient outcomes. The
game captures the dichotomy between mutual identity and individual self-interest because
cooperative ethnopolitical interactions occur only if each group receives a degree of social control
that meets or exceeds their demand.
SKYRMS [1996] turns the analysis of the Nash game on its head. The usual procedure is
to take the demands of the players as given i.e., more is better and find the equilibrium split
given these demands under varying game forms. Instead, SKYRMS posits various types of
demands related to social norms such as fairness and greediness, and analyzes which would
survive in the long-run via an evolutionary framework. This is our point of departure.
Specifically, SKYRMS indicates the following types of demands:
Modest (M): demand xM, where 0 xM < .5;
Fair (F): demand exactly half, xF = .5; and
Greedy (G): demand more than .5, 1 xG > .5.
Definition: i(xi,xj) defines the fitness of an individual making demand xi in a pairwise
6
encounter with another individual xj; i, j = M, F, G. In the Skyrms game, this payoff is:
(1)
x i if x i + x j 1,
i(xi,xj) =
0, otherwise.
Suppose that there is a large population of individuals and that they are randomly matched in
a pairwise fashion to play the Nash demand game. The entries in each cell of Box 1 represent the
outcomes of matching between any combination of modest, fair, and greedy types, as dictated by
Eq. (1). Reading across the M-row of Box 1, the first entry indicates that M-types earn a fitness or
payoff of xM each in pairwise encounters amongst themselves. As previously discussed, such an
inefficient pairing is expected to lead to more competitive future demands and does not bias the
efficiency of our results. In the second entry, when paired with an F-type, the M-types fitness is xM
and the F-types fitness is .5. In the final entry of this row, an (M,G) matching yields fitness of xM
and xG for the M- and G-types, respectively. The other six sets of payoffs are computed in a similar
manner. If, for example, two F-types are paired, then each receives .5. The pairing of F- and Gtypes results in conflict with each receiving 0, as is the case when two G-types are paired.
[Box 1 near here]
This game has several important properties. First, it is an example of a symmetric game,
which has the following two characteristics:
a.
Each player has the same strategy set, S.
b.
If r and c are the row and column players fitness/payoff functions, respectively, then
r[x,y] = c[y,x] for all pure strategies x, y S.
Payoff symmetry implies that an individual who makes demand x against another making
demand y earns the same fitness regardless whether he or she is the row or column player.
7
Second, the concept of a payoff as a measure of fitness indicates that the relative return of
one demand when matched with another (or itself) determines the likelihood that a particular
demand will characterize the population. The lower the relative payoff, the more likely a demand
will eventually be driven out in the evolutionary sense. Over time, the success of a particular
demand is also affected by the distribution of demands within the population. For example, when
greedy types predominantly demand .6, and fitness is as determined in Eq. (1), we need only
consider modest types who demand .4, because this is the demand that earns them the highest
possible fitness in pairwise encounters with greedy types. The reverse could also be said (xG = 1
xM) for the survival of greedy types in a population where there is only one predominant xM
demand. As in SKYRMS, we therefore assume that xM = 1 xG throughout. To capture this
symbiosis in terms of evolutionary dynamics, we make the following set of definitions:
Definition: If i is the proportion of individuals in the population making demand xi, and
= (1,2,....,N) is the (finite) distribution of all demands,
i =1
= 1, then the expected fitness of
type i in the population is: E[x i , ] = i (x i , x j ) j .

j=1
Definition: The population mean fitness of distribution is E[,] =
E[x , ] .
i =1
A demand has a higher fitness if it receives a better than average return. The average returns
received will be a function of the proportions of the population choosing each of the strategies, so
that we are dealing with the possible equilibria of a dynamic process (HIRSHLEIFER [1982, 15]).
!
Definition: The growth rate, i , of demand xi behaves according to the evolutionary
replicator dynamic if:
8
!
i = i [E[x i , ] E[, ]] .
(2)
The replicator dynamic states that the growth rate of demand xi is proportional to the difference
between the expected fitness of types xi relative to the mean population fitness. If i-types
(i = F, M, G) do better than the average fitness, then they will grow within the population;
otherwise, the process of natural selection will cause them to die out. The replicator dynamic
predicts the following growth rate for each type in Box 1:
!
M = M [E[x M , ] E[, ]] = M [x M {M x M + F .5 (M + F ) + G x G M }] ;
!
F = F [E[x F , ] E[, ]] = F [.5 (M + F ) {M x M + F .5 (M + F ) + G x G M }] ;
!
G = G [E[x G , ] E[, ]] = G [x G M {M x M + F .5 (M + F ) + G x G M }] .
Instead of finding all equilibrium points for this system of differential equations, we are
particularly interested in those distributions that are dynamically stable. An equilibrium is
asymptotically stable if when slightly perturbed say, by a mutant invasion of the population
the system tends to return back to the equilibrium point of the evolutionary dynamics. To this
end, MAYNARD SMITH AND PRICE [1973] made the following definition:
Definition: Distribution = ( 1 , 2 ,..., N ) is evolutionary stable for a symmetric game if:
a.
It is a population characteristic that row = column = .
b.
This distribution fends off mutant invasions that are represented by the alternative
distribution m, as specified by the first-order condition (F.O.C) and second-order condition
(S.O.C.):
(F.O.C.)
E[, ] E[m , ] m .
(S.O.C.)
If E[, ] = E[m , ], then E[, m ] > E[m , m ] .
9
In game-theoretic terms, can be interpreted as a mixed strategy that is an evolutionary stable
strategy (ESS). The condition (a) and the F.O.C. imply that is a symmetric Nash equilibrium.
The S.O.C. is an additional stability condition indicating that if m is an alternative best reply to
, then is a better reply to m than m is to itself. The S.O.C. implies that ESS is a refinement
of Nash equilibrium; indeed, it is a stricter refinement than properness.1 If i = 1, then we have
an ESS in pure strategies. ESS is our equilibrium concept because TAYLOR AND JONKER [1979]
establish that it is a sufficient condition for the asymptotic stability of equilibrium points for the
replicator dynamic.
Result 1 [SKYRMS, 1996]: The ESSs for the Nash demand game given in Box 1 are

( M , F , G ) = (0, 1, 0) and (M , F , G ) = (xM/xG , 0, (xG xM)/xG).
In biological terms, the first population distribution, (0,1,0), can be interpreted as a
monomorphism, since every individual in this population exhibits the fairness trait. The second
population distribution, (xM/xG , 0, (xG xM)/xG), can be interpreted as a polymorphism, with

(xM/xG) percent of the population making modest demand xM, and the remainder making greedy
demand xG. If the percentage of M-types exceeds xM/xG, then G-types acquire an advantage
!
within the population and M will decrease via the process of natural selection. In equilibrium,
neither the M-types nor the G-types earn a higher expected payoff than the other.
Rather than predicting the particular split that will occur in the Nash demand game,
SKYRMS analysis is novel because it identifies the types of demands than can characterize a
population. The strategies employed by individuals become the units of selection, as opposed to
the individuals who employ such strategies. This facilitates our analysis of fundamentalism at a
population level, where identity traits may define ethnopolitical conflict. For example, even
1
In contrast to properness, for n n symmetric games where n 3, there may be no ESS (e.g., rock-paper-scissors).
10
though Skyrms game is played amongst a homogeneous population, the polymorphic
equilibrium distribution allows for conflict with probability G G > 0 , a pairwise matching
results in conflicting demands. In the following section, we analyze demands when two
heterogeneous subpopulations interact in the Nash demand game, where ones demands more
closely resemble the identity traits and cohesiveness of a fundamentalist subpopulation.
3 Clash of Cultures
A clash of cultures between fundamentalists and a general subpopulation is coming to characterize

parts of the globe today (HUNTINGTON [1996]). In northern Africa, this clash involves Islamic
fundamentalists and other population subgroups in Egypt, Algeria, and Sudan (SANDLER [2000b]).
This ethnic conflict may spread to Tunisia and other southern Mediterranean countries. Islamic
extremism also poses political and social instabilities for Turkey (GIURIATO AND MOLINARI
[2002]) and Saudi Arabia. In Israel, Jewish fundamentalists are in conflict with other more
moderate groups, and present a barrier to the peace process, as the 1995 assassination of Prime
Minster Yitzhak Rabin so clearly demonstrated. Fundamentalists have kept Afghanistan at war
for over two decades. Within nearby states, Islamic fundamentalists represent significant political
and social challenges in Pakistan, Uzbekistan, and Tajikistan. In India, Sikh and other extremists
represent a clash of cultures with the general subpopulation. Fundamentalists also pose threats in
the Philippines (Abu Sayyaf Islamic fundamentalists) and Indonesia (Laskar Jihad).
When a fundamentalist subpopulation interacts with a more general subpopulation, the
effect is two-fold. First, the fundamentalists are generally more cohesive; there are organizational
economies of scale associated with a singleness of purpose. Second, fundamentalists are, by
definition, less likely to compromise on societal issues. In this context, we interpret the greedy
strategy as a way of asserting sufficient influence to change the way in which culture, religion,
11
politics, language, status, and other traits determine the outcome of a transaction. Another
interpretation is that fundamentalism signals ones unwillingness to compromise on these issues.
Our definition of fundamentalism purposely avoids specific reliance on issues such as
religion, violence, irrationality and other characterizations that can misrepresent or too narrowly
define what is a widespread phenomenon. Instead, we represent fundamentalism in terms of group
cohesiveness and an inability to compromise over issues such as morality in private life, corruption in
public state life, and deficiencies in the rule of law, all of which translate into demand for social
control.2 The fundamentalist subpopulation consists of both zealots and followers. In fact, many
economists have experienced fundamentalism of this type in their academic departments, where some
subgroup gains control over the departmental agenda and will never settle for modest demands. Such
academic fundamentalists exercise decisions on the rankings of journals, hiring, and acceptable
research topics. They often direct the seminar series and determine the prestige afforded to
colleagues accomplishments.
At the very least, fundamentalists do not propose minority status for themselves on the
cultural/ethnic issues that define their identity, which implies that fundamentalists eliminate the
modest/moderate strategy from their strategy set. We can use the Nash demand game to examine
whether this interpretation of fundamentalism affects the coordination of social control. Such a
comparative static is an explicit part of evolutionary game theory, where the strategies themselves are
the units of selection rather than the players. Peaceful coexistence often characterizes inter-ethnic
relations (FEARON AND LAITIN [1996]), so that the F strategy remains relevant for fundamentalists.
Fairness implies relatively equal social control irrespective of cultural/ethnic identity. If a more
general subpopulation is represented by the row strategies and the fundamentalist subpopulation is
represented by the column strategies, then the interaction between these two subpopulations is
We thank GEORG ELWERT for a discussion of these issues at the Wrlitz conference.
12
displayed in Box 2.
[Box 2 near here]
For this interaction, the Nash demand game is no longer symmetric, so that the replicator
dynamics and definition of ESS do not directly apply. The notion of replicator dynamics can,
however, be adapted by recognizing that, in pairwise matching between agents from distinct
subpopulations, an individual from the row subpopulation only meets individuals from the
column subpopulation. That is, an individual does not meet a colleague or mutant from his or
her own subpopulation, which implies that the S.O.C. for an ESS is vacuous, so that only the
F.O.C. applies. Hence, the asymptotic stability of an incumbent strategy of a subpopulation
requires that it must perform strictly better against the other subpopulation than does any other
(mutant) strategy from its own subpopulation. In such a situation, we must specify distinct
distributions, and for the row and column subpopulations, respectively. The replicator
dynamics corresponding to our cross-population discussion of fitness (TAYLOR [1979]) are
defined as:3
(3)
!
i = i [E[x i , ] E[, ]] for x i Srow = Sr ,
(4)
!
j = j [E[y j , ] E[, ]] for y j Scolumn = Sc .
Again, a simple static characterization holds for the asymptotic stability for fixed points of these
coupled differential equations:
Result 2 [SELTEN, 1980]: (xi,yj) is an ESS for an asymmetric game if and only if it is a
Result 2 is a direct function of SELTENS requirement that pairwise matchings occur as in a truly asymmetric
contest; i.e., those in -subpopulation (-subpopulation) do not meet others in the -subpopulation (-subpopulation)
in contests that determine social control. Hence, one need not consider mutants representing alternative best replies
within the same subpopulation, thus implying that the F.O.C. must hold with strict inequality. By contrast,
WRNERYD [1993] considers an evolutionary model (in an unrelated context) where matchings within and across
subpopulations are possible and the equilibrium occurs in mixed strategies.
13
strict Nash equilibrium.
Strategy pair (xi,yj) is a strict Nash equilibrium when xi is the unique best reply to yj, and
vice versa. Hence, an ESS cannot occur in mixed strategies, because, by definition, any pure
strategy that is played with positive measure receives the same expected payoff. Result 2 is
stated in terms of pure strategies with foresight of this consequence.
From the perspective of our analysis of fundamentalism, SELTENS result states that the
equilibria in clash of cultures can only be monomorphic outcomes. This is entirely the aim of
fundamentalist attempts at social control first, to remove any heterogeneous elements within its
own subpopulation (cohesively raising ethnic identity), and second, to impose its doctrine as the
cultural norm for interaction throughout society. Application of this result to the clash of
cultures game illustrates this point.
Result 3: The ESSs for the game in Box 2 are (F,F) and (M,G).
In contrast to the analysis of the Nash demand game among a single population, now all equilibria are
monomorphic. The monomorphism of the fundamentalist subpopulation is not surprising. What is
novel is that ESS requires the general subpopulation to be monomorphic as well, which is a direct
consequence of SELTENs [1980] result. Fairness in both subpopulations is a distinct possibility, but
if any group is to gain the lions share, it is the fundamentalist subpopulation as identified by the
(M,G) equilibrium.
4 The Evolution of Ethnopolitical Conflict
One of the most important contributions of evolutionary game theory is that it provides a theory
of population dynamics that determines how equilibrium is reached. The initial distribution of
demands is unlikely to be monomorphic. If, indeed, the fundamentalist subpopulation rules out
14
moderate behavior as in the clash of cultures game the degree to which this creates conflict is
a likely predictor of whether the (F,F) or (M,G) equilibrium prevails. The replicator dynamic
allows us not only to focus on the equilibrium outcome, but also to predict the evolutionary path
over generations of pairwise matchings leading to that equilibrium. We are particularly
interested in how initial demand distributions among the general subpopulation and/or
fundamentalists determine which equilibrium results. For this exercise, we use the discrete
version of the replicator dynamics (THOMAS [1986]), where for the initial population distribution
(0,0), the distribution at generation k + 1 is given by:
(5)
(6)
k +1
i
k +1
j
ik E[x i , k ] expected fitness of x i under distribution k

=
=
,
E[k , k ]
mean fitness of distribution k
=
k E[y j , k ]
j
E[k , k ]
expected fitness of y j under distribution k

mean fitness of distribution k
Eq. (5) states that the proportion of players in the non-fundamentalist subpopulation that make
demand xi in the next generation (k + 1) depends only on how non-fundamentalists do against the
fundamentalists (in generation k), rather than amongst themselves. This is the essence of SELTENS
[1980] result, and is reflected in the fact that the fitness of demand xi Si in the general
subpopulation is determined only through its matching with demand yj Sj from the fundamentalist
subpopulation. Such matchings occur in generation k according to distribution k. The numerator of
(5) measures the expected fitness of xi Si against the fundamentalist subpopulation, jk, weighted
by the proportion of the general subpopulation, ik, that makes demand xi. The denominator
measures the average expected fitness of the general subpopulation when distributed according to k,
and each individual is matched with a fundamentalist according to distribution k. If nonfundamentalist demand xi does better (worse) against the fundamentalists than the mean fitness, this
15
type will increase (decrease) in generation k + 1. Similar intuition holds for (6) the evolution of
fundamentalist demands depends on the success (failure) of their dealings with non-fundamentalists.
The growth and possible convergence of the demands in the fundamentalist and nonfundamentalist subpopulations are, in part, determined by the distribution of demands in the
opposing population. Eqs. (5) and (6) reflect a coupled symbiosis whether or not a
subpopulation converges to distribution * (*) not only depends on the initial distribution of its
own demand 0 (0), but also on that of the coupled subpopulation, 0 (0). The asymptotic
stability of such a distribution is characterized by SELTENS [1980] theorem, stated in result 2.4
The implications of fundamentalism and the potential for conflict can be derived through
a simulation of the discrete replicator dynamics for the clash of cultures game. This simulation
depends on three variables: the greedy demand (xG), assumed to be the same in either
subpopulation;5 the initial distribution (0) in the general subpopulation; and the initial
distribution over fundamentalist demands (0). The results for each triple can be summarized by
the graphical depiction of Fk in Figures 1 and 2. According to result 3, only (F,F) and (M,G)
are asymptotically stable. It follows that if Fk = 1, the system converges to the (F,F)
equilibrium; if, however, Fk = 0, the system converges to (M,G).
[Four-panel Figure 1 near here]
In each of the four panels of Figures 1 and 2, the vertical axis depicts the ratio of F-types
in the general subpopulation, F, while the horizontal axis indicates the number of generations.
For example, in panel a of Figure 1, a greedy type demands xG = .6 and half of the general
subpopulation is initially fair (F0 = .5). If half of the fundamentalist subpopulation is initially
fair (G0 = .5), the system converges to the (F,F) equilibrium, as Fk1. Yet, the conventional
4
See also TAYLOR [1979].

As xG is dominated for the general subpopulation in Box 2, it is played with probability zero by the general
subpopulation in our simulations.
16
wisdom is that it is unlikely that the fundamentalist subpopulation will be so compromising, with
half of its members making fair demands. If, instead, we allow G0 = .6, Figure 1a illustrates
that the system converges to the (M,G) equilibrium (Fk0). For a larger proportion of greedy
fundamentalists, the convergence to the (M,G) equilibrium is even faster. What the simulation
illustrates is that when the fundamentalists are not overly insistent in their demands (xG = .6),
they do not need an initially high level of cohesiveness in order for their identity traits to define
social control. The system converges to (M,G) even though initially only 60% of the
fundamentalists are greedy.
In sharp contrast, Figure 1d illustrates that if we have F0 = .5, but the fundamentalist
subpopulation is more obstinate, demanding xG = .9, the system converges to an (F,F)
equilibrium even if 80% of the fundamentalist subpopulation is greedy. The intuition is that,
from such a starting point, fair elements of the fundamentalist subpopulation do much better than
greedy ones against the non-fundamentalist subpopulation. In order for xG = .9 to lead to the
(M,G) outcome, at least 90% of the fundamentalist subpopulation must initially be making this
demand (G0 = .9). Figures 1a-1d demonstrate that as fundamentalists show less tolerance
(increasing xG), greater proportions of their initial subpopulation distribution must possess this
intolerance if (M,G) is to be the equilibrium.
[Four-panel Figure 2 near here]
Figure 2 presents four panels 2a-2d where 80% of the general subpopulation is
initially fair. Even for a small degree of fundamentalist intolerance, xG = .6, in Figure 2a, 90%
of the initial fundamentalist subpopulation must be intolerant for the equilibrium to converge to
(M,G). As xG increases, the speed of convergence to (F,F) increases. In Figure 2d, convergence
to (F,F) occurs within eight generations, even when 90% of the fundamentalists possesses greedy
demands of xG = .9.
17
Result 4: For the clash of cultures game, the following holds:
i.
Intolerant fundamentalism (increasing xG) requires initially greater cohesion (a higher G0) if
they are to take social control. This can be seen by consulting panels a-d of Figures 1 and 2.
Higher fundamentalist demands, xG, require a more cohesive fundamentalist subpopulation
in order for fundamentalism (M,G) with a subservant general subpopulation to prevail.
ii.
The success of fundamentalism depends on the existence of moderate behavior in the

non-fundamentalist subpopulation. This can be seen through side by side panel
comparisons of Figures 1 and 2. As M0 decreases (F0 increases), implying that the
general subpopulation is less willing to acquiesce to fundamentalist demands, the (F,F)
outcome prevails.
iii.
Dogmatic fundamentalists (xG = 1) die out quickly. This is because modest elements of
the general subpopulation would earn a fitness of zero when matched against greedy
fundamentalists. If the greedy demand is 1, then the system converges to the (F,F)
equilibrium (not illustrated).
iv.
We extend FEARON AND LAITINS [1996] study of peaceful and cooperative ethnopolitical
interactions based on the Prisoners Dilemma to the case of the Nash demand game.
The (F,F) equilibrium occurs for a wide array of initial population distributions and greedy
demands.
5 Preference Falsification
As there are countless incidents of peaceful inter-ethnic relations (e.g., Jordan and Morocco)
despite the presence of fundamentalist groups, the xF demand remains relevant for the
fundamentalist subpopulation. One of the stated goals of fundamentalism is to transform the
general subpopulation, so that fundamentalist traits and norms determine access to state power.
18
An often-observed aspect of fundamentalism is the willingness to make fair demands for
pairwise matchings with others who observe fundamentalist behavior. Notice that we are careful
not to say that fundamentalists make fair demands only with other fundamentalists. When there
are two distinct subpopulations, what is important is the willingness of non-fundamentalists to
behave according to fundamentalist doctrine. If fundamentalism operates in this vein, then the
opportunities are ripe for preference falsification as a means to maximize payoffs and fitness. In
Afghanistan, for example, non-Taliban women wore Burqas and men grew beards as a signal of
their adherence to Taliban mores. In academic departments, non-fundamentalists may mimic
fundamentalist traits so that they are treated better. If, for example, the empiricists are the
fundamentalists, then some theorists may co-author papers with empiricists to enhance their
position.
Our use of preference falsification provides an evolutionary game foundation to the
influential work of TIMUR KURAN [1989, 1991], for which the truthful revelation of preferences
depends on threshold choices for participating in a revolution and the size of a revolutionary
collective. In our model, preference falsification or truthful expression hinges on population
dynamics driven by fitness. As such, the initial demands of non-fundamentalists, as well as the
intolerance (greed) of the fundamentalists, determine whether non-fundamentalists falsify their
preferences by signaling fundamentalist traits. Thus, the underlying thresholds for truthful
revelation is dependent on population dynamics and preference parameters. Shocks that change
the population proportions e.g., US bombing of Afghanistan on 7 October 2001 can either
augment non-fundamentalist proportions (i.e., F) or decrease fundamentalist proportions (i.e.,
G), so that preference falsification decreases sufficiently, thereby ending an intolerant
fundamentalist regime.
Suppose that non-fundamentalists and fundamentalists alike have access to such a
19
strategy, which signals their willingness to adhere to fundamentalist doctrine, thereby avoiding
cross-population conflict. That is, fundamentalism affords falsifiable behavior to the general
subpopulation such that adherence to this behavior reduces cross-cultural friction. In this
scenario, the following definition proves important:
Definition: A falsifiable fundamentalist strategy, , is a conditional strategy6 that is
greedy when matched with any strategy other than itself, and fair when matched with others
exhibiting the -traits. Formally, we have the following strategy:
(7)
Demand .5 when matched with a from the other subpopulation, and

=
demand x G in all other subpopulation matchings.
When falsifiable behavior replaces greediness in the clash of cultures game, the results of
pairwise matchings are given in Box 3. The analyses of Boxes 1, 2, and 3 therefore represent a
natural progression from a situation where fundamentalists eliminate moderate demands in an
attempt to gain social control (Box 1 to Box 2) to one in which they allow for preference
falsification () in a further bid for social control (Box 2 to Box 3). The latter eliminates the
greedy demand, because it is dominated by .
[Box 3 near here]
By allowing the general subpopulation to avoid intolerance only by adhering to
fundamentalists terms, the fundamentalists create a model of behavior alternative to fairness that
is aligned with their identity traits. Fundamentalists prefer that social power sharing be done on their
terms, rather than a general principle of fairness. Iran after the 1979 revolution, which brought
Ayatollah Khomeini to power, conforms to this scenario, because individuals who signaled their
adherence to the strict Islamic doctrine were integrated into the society. Similar situations
6
See DAWKINS [1980] for an introductory discussion of conditional strategies.
20
characterize present-day Algeria, Nazi Germany under Hitler, or any regime where tolerance is solely
based on displaying certain identity traits. In contrast to the clash of cultures where greediness is a
dominated strategy for the general subpopulation (in strategy set Sr) falsification is not a dominated
strategy for this subpopulation. Indeed, even if preference falsification comes at some cost, is an
undominated strategy, provided that r(,) > xM i.e., preference falsification is not too costly. In
this way, the results presented below are not tied to the requirement that r(,) = .5. We have
similar results for simulations in which falsification is costly, i.e., .5 > r(,) > xM.
The game has two ESSs (F, F) and (,). At first, the strategy may appear as little
more than fairness, but an illustrative comparison of two simulations demonstrates that sharing
under fundamentalist terms differs substantially from fairness. Consider the case where the
fundamentalist subpopulation is not initially cohesive; there is a 60:40 split among - and F-types.
Further assume that the greedy demand is .6. In our first simulation, the initial general
subpopulation distribution is (M0, F0, 0) = (.45, .05, .50). This is illustrated in panel a of Figure
3 where, in contrast to Figures 1 and 2, the evolution of all three types in the general subpopulation
are depicted for an initial fundamentalist distribution ( = .6). The system then converges to the
(,) outcome. As expected, if more of the general subpopulation is inclined toward at the outset
(as compared to F), then (,) results.
[Three-panel Figure 3 near here]
The key to the effectiveness of the strategys impact on the general subpopulation is seen
through a second simulation, where the initial and F proportions for the non-fundamentalists are
reversed. Suppose that just 5% of the modest types in the general subpopulation are at the outset
willing to behave according to . That is, given that there are rewards for behaving according to
, we ask what happens if even a tiny proportion of the modest elements of the general
21
subpopulation opts for instead, as represented under the distribution (M0, F0, 0) = (.45, .50,
.05). Panel b of Figure 3 illustrates that once such a perturbation occurs, preference falsification
occurs in an extreme way, ultimately resulting in the (,) equilibrium. From this initial 0, the
replicator dynamics produce a situation where by generation 13 the general subpopulation is
almost entirely modest, and 70% of the fundamentalist subpopulation will share with those
elements in the general subpopulation who adopt their cultural identity (13 = .7 not illustrated).
Hence, the situation is not stable; (M13, 13) (1, .7) is not an ESS and the replicator dynamics
bear this out. The general subpopulation further evolves, completely switching to the strategy!
The convergence to (,) is unexpected and indicates that has a much larger basin of attraction
than F, even though each yields .5 payoffs in symmetric matches. The fundamentalist
subpopulation increases monotonically in it is becoming more cohesive and by generation
46 the overall distribution is (46, 46) = (1, 1). This outcome is asymptotically stable, as it is an
ESS for the game in Box 3. Allowing for falsification therefore undermines the robustness of the
fairness outcome and facilitates the acceptance of fundamentalist terms in the general
subpopulation.
Another novel result is that our prior observation that increased greediness requires a
more cohesive fundamentalist subpopulation no longer applies when fundamentalism is
falsifiable. Panels b and c of Figure 3 reveal that, when xG is increased from .6 to .8, the intrastate distribution rapidly converges to (,) even though 0 is unchanged at 60% (and 0 =
.05). This follows because the benefits of modest demands have decreased relative to falsifiable
ones. Payoffs for xM are .4 in Figure 3b and are just .2 in Figure 3c. Without a falsifiable trait,
the success of increased greediness hinges on the cohesiveness among the fundamentalist
subpopulation (an increase in G0) (see Figures 1 and 2). For falsifiable traits, more extreme
22
fundamental demands, in sharp contrast, result in rapid convergence to the entire population
displaying fundamentalist traits. This bandwagon effect occurs even for small 0. Thus, we
have:
Result 5: When the identity traits of fundamentalism are falsifiable and conditionally
fair, then :
i.
The falsifiable strategy has a larger basin of attraction than fairness.
ii.
Extreme demands applied to anyone not adhering to fundamentalist identity traits will not
only increase the cohesiveness of the fundamentalist subpopulation, but will also cause
the general subpopulation to capitulate rapidly.
As noted by KURAN [1991], the breakdown of preference falsification can result in the
rapid elimination of a regime e.g., the Milosevic regime in Bosnia, the 1989 Velvet Revolution
in Czechoslovakia, the Taliban in Afghanistan, and the communist regime in East Germany.
With less preference falsification, intolerance is unable to sustain a fundamentalist regime when
the proportion of the general subpopulation making fair demands is large, or the cohesiveness of
the hardline fundamentalists is reduced. Similarly, when members of an academic department
stop falsifying their preferences owing to the departure of a few intolerant colleagues, the overall
acceptance of alternative viewpoints may return, rapidly.
6 Concluding Remarks
This paper has put forth an evolutionary game-theoretic basis of conflict between subpopulations
making different demands for control. The underlying dynamics of our approach to conflict,
where paired individuals cannot agree on a division, is quite different from the (static) rentseeking conflict models so prevalent in the literature. Both the evolutionary game and the rent-
23
seeking approaches have their relative strengths and weaknesses. The former is particularly
suited to displaying population dynamics and convergence to an equilibrium where a single type
or trait is in control. Additionally, the evolutionary representation provides a dynamic
framework for KURANS [1989, 1991] theory of preference falsification, whereby a nonfundamentalist subpopulation can co-exist in equilibrium with a fundamentalist one by taking on
the latters identity traits. In so doing, greater greed by the fundamentalists to those not
displaying their traits may bolster the fundamentalists hold, unlike the case with no preference
falsification. This chameleon behavior by non-fundamentalists may be consistent with rapid
regime changes in response to either the elimination of preference falsification or changing
population distributions brought about by external shocks. Although chameleon behavior can
ensure co-existence between fundamentalists and non-fundamentalists, this behavior is apt to
eliminate non-chameleons from the general subpopulation who make modest or fair demands,
owing to the large basin of attraction for preference falsification. Thus, co-existence through
signaling may come at a high price as Afghanistan sadly demonstrated to the world.
A wide variety of conflict relationships can be examined by evolutionary game theory.
Games other than the Nash demand game can form the basis for future analyses. Additionally,
elements of rent seeking can be introduced into our framework, so that relative efforts by
opposing interests can help determine fitness results among paired encounters with and without
preference falsification.
24
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Biosciences, 40, 145 56.
THOMAS, L. C. [1986], Games, Theory and Applications, Ellis Horwood: Chichester, UK.
WRNERYD, K. [1993], Anarchy, Uncertainty, and the Emergence of Property Rights, Economics
and Politics, 5, 1 14.
Daniel G. Arce M.
Department of Economics
Rhodes College
2000 N. Parkway
Memphis, TN 38112-1690
USA
E-mail: arce@rhodes.edu
Todd Sandler
USA
E-mail: tsandler@usc.edu
Box 1: Skyrms Game (xM = 1 xG)

M
xM, xM
.5, xM
xG, xM
Modest (M)
Fair (F)
Greedy (G)
F
xM, .5
.5, .5
0, 0
G
xM, xG
0, 0
0, 0
Box 2: Clash of cultures

F
xM, .5
.5, .5
0, 0
Modest (M)
Fair (F)
Greedy (G)
G
xM, xG
0, 0
0, 0
Box 3: Falsifiable Fundamentalism
Modest (M)
Fair (F)
Falsifiable ()
F
xM, .5
.5, .5
0, 0
xM, xG
0, 0
.5, .5
Figure 1
Figure 2
Figure 3
Terrorism and Game Theory

By
Todd Sandler
And
Daniel G. Arce M.
Rhodes College
Forthcoming
Simulation & Gaming
Vol. 34 (3) September 2003
Terrorism and game theory

Abstract
This article examines how game-theoretic analyses of terrorism have provided some policy
insights that do not follow from nonstrategic analyses. Some new game-theoretic applications
are indicated that concern terrorist targeting of businesses, officials, and the general public,
where targets can work at cross-purposes as they attempt to deflect the attack. Other novel
applications involve government choice among alternative anti-terrorism policies, and
government concessionary policy when terrorists are either hard-liners or moderates in their
viewpoint. Directions for future research are also indicated.
KEYWORDS: game theory, terrorism, transnational terrorism, deterrence, preemption,

concessionary policy, target choice, asymmetric information
Terrorism and Game Theory

Over the last two decades, a small group of analysts in economics and political science
have applied game theory to study terrorism,1 which involves the premeditated use or threat of
use of violence or force on the part of terrorists to achieve a political objective through
intimidation or fear. For example, Sandler et al. (1983) present some rational-actor models that
depict the negotiation process between terrorists and government policymakers for incidents
where hostages or property are seized and demands are issued. In their model, terrorists
valuation of the likely concession to be granted by a government is based on a probability
distribution, conditioned on past governmental concessions. Their analysis illustrates that the
terrorists choices and actions are influenced by those of the government and vice versa.
Moreover, each adversary acts on its beliefs of the opponents anticipated actions.
Since 11 September 2001 (hereafter 9/11), there are many papers being written by
scholars who apply game theory to the study of terrorism. Game theory is an appropriate tool for
examining terrorism for a number of reasons. First, game theory captures the strategic
interactions between terrorists and a targeted government, where actions are interdependent and,
thus, cannot be analyzed as though one side is passive. Second, strategic interactions among
rational actors, who are trying to act according to how they think their counterparts will act and
react, characterize the interface among terrorists (e.g., between hard-liners and moderates) or
among alternative targets (e.g., among targeted governments, each of which is taking protective
measures). Third, in terrorist situations, each side issues threats and promises to gain a strategic
advantage. Fourth, terrorists and governments abide by the underlying rationality assumption of
game theory, where a player maximizes a goal subject to constraints. Empirical support for
terrorists rationality is given credence by their predictable responses to changes in their
constraints e.g., the installation of metal detectors in January 1973 led to an immediate
2
substitution away from skyjackings into kidnappings (Enders, & Sandler, 1993, 1995; Sandler, &
Enders, 2004). Fifth, game-theoretic notions of bargaining are applicable to hostage negotiations
and terrorist campaign-induced negotiations over demands. Sixth, uncertainty and learning in a
strategic environment are relevant to all aspects of terrorism, in which the terrorists or
government or both are not completely informed.
The purpose of this keynote article is to review how game theory has been applied in the
literature on terrorism. Another purpose is to present some new applications that include
terrorists choice of target (i.e., business people, officials, and tourists), governments choice
between preemption and deterrence, and government concessionary policy when terrorists are of
two minds hard-liners and moderates. These applications illustrate how game theory can be
fruitfully employed to enlighten policymaking.
A brief look at the literature

One of the pillars of US anti-terrorism policy is never to negotiate or capitulate to the
demands of hostage-taking terrorists (US Department of State, 2002, p. xii). This same nonegotiation stance has been taken by other countries, such as Israel. The logic to this policy is
that if a target adheres to its stated no-negotiation policy, then would-be hostage takers would
have nothing to achieve and so would stop abducting hostages. This outcome implicitly assumes
that terrorists only gain from achieving their demands and that both sides are completely
informed so that the subgame perfect equilibrium is to pledge not to concede. Obviously,
something is incomplete about this logic, because terrorists continue to take hostages and even
the staunchest advocates of the no-negotiation policy have reneged on their pledge. For
example, the Reagan administration bartered arms for the release of Rev. Benjamin Weir, Rev.
Lawrence Jenco, and David Jacobsen during the 1985-86 Irangate scandal; Israel was prepared
3
to trade prisoners for the school children taken Maalot in May 1974.
Lapan and Sandler (1988) elucidate the policys incompleteness with a game in extensive
form where the government first chooses the level of deterrence, which, in turn, determines the
logistical failure or success of terrorists when they engage in a hostage mission. A higher level
of deterrence elevates the likelihood of logistical failure. Based on their perceived likelihoods of
logistical and negotiation success, the terrorists decide whether or not to attack. If their expected
payoffs from hostage taking are positive, then they attack. The game can end in four ways: no
attack; an attack that results in a logistical failure; a successful attack that ends with the terrorists
obtaining their demands; and a successful attack that results in no concessions. Information is
incomplete because the government does not know the payoffs associated with not capitulating
prior to hostage incidents. If a sufficiently important person is secured, then the government
may regret its no-negotiation pledge, because the expected costs of not capitulating may exceed
that of capitulating. That is, the no-negotiation policy is time inconsistent if sufficiently valuable
hostages are captured. Even when the governments pledge not to negotiate is believed by the
terrorists, a fanatical group may still engage in a hostage mission when a positive payoff is
associated with either a logistical or negotiation failure by advertising the cause or achieving
martyrdom.
Lapan and Sandler (1988) demonstrate that the effectiveness of the no-negotiation
strategy hinges on the credibility of the governments pledge, the absence of incomplete
information, the terrorists gains being solely tied to a negotiation success, and sufficient
deterrence spending to eliminate logistical success. In practice, each of these implicit
assumptions is suspect. Efforts to restrain a governments discretionary action in hostage
scenarios say, through a constitutional amendment or costly punishment are required to
eliminate a governments ability to renege on its stated policy. Lapan and Sandler (1988)
4
examine the importance of reputation costs in a multi-period model. Their analysis stands in
stark contrast to nonstrategic hostage-taking models by Islam and Shahin (1989) and Shahin and
Islam (1992), where there are no explicit strategic interactions and feedback between adversaries.
Atkinson et al. (1987) uses an extension to Nashs bargaining game, where time involved
in negotiations is included (Cross, 1969, 1977). The duration of the incident and the bargains
consummated depend on the costs of bargaining, the impatience of the adversaries, the duration
of the incident, and the discovery of bluffs (i.e., threats not carried out). These authors utilize
real-world data from hostage-taking incidents to test the underlying model of bargaining.
Another application of game theory involves terrorists choice of targets for a threeplayer game involving two targeted nations and a common terrorist threat (Sandler, & Lapan,
1988; Sandler, & Siqueira, 2003). Each nation independently chooses its deterrence
expenditures, which again determines the terrorists logistical failure probability on that nations
soil. The terrorists pick the venue with the highest expected payoff for their attack. Each
nations choice of deterrence confers benefits and costs on the other target. By transferring the
attack abroad, each nation imposes an external cost on its counterpart; however, by limiting
attacks and their severity at home, each nation provides an external benefit to foreign residents.
Moreover, an external benefit arises whenever the deterrence efforts of the nations sufficiently
degrade the terrorists expected benefits, so that they attack no one. The more fanatical are the
terrorists, the less likely is the no-attack scenario. Sandler and Lapan (1988) show that the Nash
equilibrium where each nation chooses its deterrence in isolation may result in too much or too
little deterrence when compared with a social optimum, depending on the pattern of external
costs and benefits.3 If, for example, attacks in either country leads to no collateral damage on
foreign residents or interests, then the countries will engage in a deterrence race as each tries to
transfer the potential attack abroad, where it has no residents.4 In a globalized society where a
5
countrys risks from a terrorist attack are equal everywhere, independent deterrence choices
imply too little deterrence as each country fails to account for the protection that its efforts confer
on foreign residents (Sandler, & Siqueira, 2003).
The game-theoretic approach reveals a couple paradoxes. Countries may work at crosspurposes when deterring terrorist attacks. Although the United States (US) is the target of
approximately 40% of all transnational terrorist attacks, virtually all of these attacks occurred
abroad in recent years with 9/11 being a noticeable exception (Sandler, 2004). US
overdeterrence means that it experiences attacks where it has little authority to do anything about
them. Additionally, efforts to share intelligence on terrorists preferences and resources may
exacerbate this overdeterrence if deterrence decisions are not coordinated as nations use this
information to augment efforts to transfer the attacks abroad (Sandler, & Lapan, 1988; Enders, &
Sandler, 1995). This is a standard second-best result in economics in which there are two
relevant policy variables share intelligence and coordinate deterrence but joint action only
involves a single variable. This result highlights the beauty of a strategic approach. Standard
intuition suggests that pooling information should enhance welfare, but this is not the case if this
sharing worsens the deterrence race that wastes resources without necessarily increasing security
against a determined terrorist group.
Another game-theoretic representation analyzes a situation of asymmetric information
where the terrorists know their true strength, but the targeted government must guess the
terrorists resources based on the level of their attacks. These attacks are intended to apply
sufficient pressures, in terms of costs, to a government, so that it concedes to terrorist demands.
In a deterministic setting, the outcome of the struggle between the adversaries would be known
even before the first play of the game, because, in the absence of ties, a finite game of perfect
information has a unique subgame perfect equilibrium. If, for example, the government is aware
6
that the terrorists possess sufficient resources to force the government to surrender eventually,
then the optimal strategy is for the government to concede at the outset and suffer no attack
damage. If, moreover, a well-informed terrorist group understands that it has insufficient
resources to obtain its political demands, then it is optimal either to abandon the campaign or
expend all of its resources at the outset.
A more interesting and relevant scenario is when the government is incompletely
informed about the terrorists capability.5 Lapan and Sandler (1993) analyze this scenario in
which a signalling equilibrium may allow a government to limit its expected costs from attacks,
even though the likelihood of surrender may increase. In this scenario, the extent of terrorist
incidents may provide information to the government about the type of terrorist group strong or
weak that it confronts. Attacks therefore serve as a signal that the government can process to
adjust its posterior beliefs concerning the resources of the terrorists (also, see Overgaard, 1994).
Such updated beliefs permit the government to decide whether to capitulate or resist. The
terrorists face an interesting tradeoff the use of large amounts of their resources at the outset
may correctly or incorrectly convince the government that they are strong, but this outlay results
in less future attacks if the government is unconvinced. A perfect Bayesian equilibrium for the
two-period signalling game is derived in which the government prefers the associated partialpooling equilibrium, where the government surrenders to groups whose first-period attacks
exceed a certain threshold, over the never-surrender equilibrium. The pooling equilibrium is
associated with some regret when the government misjudges the terrorists true strength based on
initial attacks. Intelligence is valued, because it can reduce this regret by curtailing the variance
of government priors.
Another interesting application of game theory to terrorism involves accommodations
reached between terrorists and a host government (Lee, 1988; Lee, & Sandler, 1989). In such
7
scenarios, a terrorist organization has an implicit understanding that it can operate with impunity,
provided that its attacks do not create collateral damage for the host country. This
accommodation can undo efforts of other countries to retaliate against a terrorist group by
reducing their cooperative payoffs. Thus, nations now have three options in their reaction to
terrorists and their sponsors: do nothing, retaliate against the terrorists and their sponors, or
accommodate the terrorists. The last option helps the terrorists at the expense of the cooperating
nations. Lee (1988) shows that this third option dominates the other two, thereby resulting in a
PRISONERS DILEMMA where some nations seek such accommodations and, in so doing,
undo the accomplishments of others to curtail the terrorist threat. Once again, pursuit of selfinterest may harm others owing to strategic considerations.
Proactive versus reactive policies

Governments anti-terrorism policies are either proactive or reactive. Proactive policy
involves aggressively going after the terrorists and eliminating their resources, infrastructure, and
personnel, while reactive policy concerns protective measures either to divert the attack or limit
its consequences. A preemptive strike against the terrorists or their state sponsors (for example,
the Taliban in Afghanistan) is an example of a proactive policy. Because a preemptive attack, if
successful, eliminates the terrorist threat for all potential targets, there is a tendency to free ride
or rely on the efforts of others.
This is illustrated in matrix a in Figure 1 in which two players the US and the European
Union (EU) must decide whether or not to preempt a common terrorist threat. Suppose that
preemption by each country confers 4 in benefits on both countries at a cost of 6 to the country
doing the preemption. If, therefore, the US preempts and the EU free rides, then the EU receives
4 in benefits, while the US nets 2 (= 4 6) as costs of 6 are deducted from derived benefits of 4.
8
The payoffs are reversed when the US free rides, while the EU takes action. If, however, both
countries preempt, then each receives 2 in net benefits, as preemption costs are deducted from
gross benefits of 8 (= 2 4). The resulting game is a PRISONERS DILEMMA where no one
takes an aggressive stance against the terrorists.
Figure 1 about here
In matrix b, a different scenario is depicted where, unlike the EU, the US gains a net
benefit from its own preemption, because it is the favorite target for transnational terrorists.
Suppose that US preemption gives it 8 in benefits while conferring just 4 in benefits to the EU as
the US counters its greater threats. Further suppose that preemption by the EU gives 4 in
benefits to both countries. Preemption is again assumed to cost 6. If the US preempts alone,
then it nets 2 (= 8 6), while the EU still gets a free-riding gain of 4. If, instead, the EU
preempts alone, then the US receives 4 as the free rider and the EU receives 2. When both the
US and the EU preempt, the US nets 6 [= (8 + 4) 6] and the EU nets 2. Now, the US has a
dominant strategy to preempt and the EU has a dominant strategy to free ride, leading to the
asymmetric-dominant Nash equilibrium in the upper right-hand cell of matrix b. This game
representation may well characterize the US position after 9/11, where US action was going to
yield high payoffs to the US government. With the collapse of the twin towers of the World
Trade Center and the damage to the Pentagon, the US had to take some kind of decisive action to
maintain legitimacy.
Up to this point, the status quo of doing nothing resulted in a 0 payoff. Suppose,
however, that no action whatsoever leads to a world under siege by terrorists. In this scenario,
the absence of any preemption may imply a negative payoff, which for matrix a would result in a
CHICKEN game whenever this payoff is less than 2 (not shown in Figure 1), the payoff from
acting alone. For CHICKEN, the Nash equilibria has some country responding. A
9
COORDINATION game may also apply to preemption if both countries must combine forces to
achieve the positive payoffs of 2 (= 2 4 6). This game is displayed in matrix c in Figure 1. If
only a single country preempts, then there are no benefits, but the preemptor incurs a cost of 4
thus, the off-diagonal payoffs are (4, 0) and (0, 4). The two pure-strategy Nash equilibria in
matrix c correspond either to both countries preempting or neither preempting. Thus,
preemption may be consistent with a number of different game forms depending upon symmetry,
penalties for the status quo, preemption thresholds, or other considerations. Even though
preemption confers free-rider benefits, a PRISONERS DILEMMA may not result.
Next, consider other proactive policies and their associated game forms. In the case of
group infiltration, the nation conducting the operation often secures benefits over and above
those conferred on other potential targets. This follows because the infiltrator can exploit the
intelligence first and will target those terrorist groups that pose the greatest risks to its interests.
As a consequence, an asymmetric dominance is likely to apply, not unlikely the preemption
scenario in matrix b in Figure 1. If, however, the infiltrator receives no special advantages, then
a PRISONERS DILEMMA is anticipated. Retaliation against a state sponsor of terrorism, such
as the US raid against Libya in April 1986 or the US-led attack against Afghanistan following
9/11, is an analogous situation to preemption with lots of potential free-rider benefits. As such,
the same game forms as those associated with preemption, are relevant. When intelligence is
collected as a proactive policy, the asymmetric-dominance scenario is appropriate, especially if
one nation is more often the target of transnational terrorist attacks. The intelligence collector
gains relative to free riders.
Reactive responses include deterrence, embassy fortification, and UN conventions. For
deterrence, each target takes protective actions to divert the attack. Any nation that spends less
on deterrence becomes the more desirable target. This scenario often leads to a deterrence race,
10
best described as a PRISONERS DILEMMA with too much action (Sandler, 2003).6 An
analogous scenario characterizes embassy fortification, since the least-fortified embassy becomes
the target of opportunity for the terrorists. All potential targets increase fortification
expenditures, but do not necessarily eliminate the attack if the terrorists are bent on attacking
someone. For UN conventions, a PRISONERS DILEMMA results when it comes time to
enforce the convention as each nation sits back waiting for others to act for the good of all. UN
conventions on outlawing terrorism and its modes of operation (e.g., skyjackings, attacks against
diplomatic personnel) have been shown to have no impact whatsoever in accord with the Nash
equilibrium of no enforcement, associated with the PRISONERS DILEMMA representation of
enforcing UN conventions (Enders et al., 1990).
Table 1 about here
Table 1 summarizes the different proactive and reactive policies and their associated
game forms.
Alternative targets
To illustrate the deterrence decision, we apply the model from the literature (Sandler, &
Lapan, 1988; Sandler, & Siqueira, 2003) to a novel choice where a terrorist group can target a
business (B) or tourist (T) venue. As such, this terrorist choice of targets may involve domestic
or transnational terrorism. The terrorists are assumed to stage their attack at a single venue in
each period.7 Additionally, the terrorist group is assumed to be fanatical (i.e., gaining a net
benefit even if the mission fails), so that the group will attack one of the two venues.8 Figure 2
depicts the associated deterrence game tree where the targets go first and choose their level of
deterrence or deterrence costs i.e., D(B) for the business target and D(T) for the tourist target.
By choosing their deterrence expenditure to thwart attacks, the two targets affect the terrorists
11
perceived probability of success or failure, where B and T are the probabilities of logistical
failure when the business or tourist venue is attacked, respectively. Thus, 1 B and 1 T are
probabilities of logistical success for attacks at these two venues. Deterrence costs increase with
B at an increasing rate, so that D(B) > 0 and D(B) > 0. The same is true for deterrence costs
spent to protect tourists.
Figure 2 about here
The terrorists move second where they decide whom to attack, in which their attack
probability i against target i (= B, T) depends on their perceived probabilities of failure i.e.,
i(i, j) for i, j = B, T and i j. This probability function is assumed continuous with i/i < 0
and i/j > 0, so that information is not complete with respect to terrorists beliefs and values.
The assumed partial derivatives indicate that efforts to decrease success in venue i through
greater deterrence lowers the likelihood of attack there and transfers the attack to the other
venue, so that independent deterrence decisions may work at cross-purposes.
Because terrorists are assumed fanatical, the game can end in four outcomes: terrorist
failure or success at the business target, or terrorist failure or success at the tourist target. Within
the four bold parentheses in Figure 2, the payoffs to business, tourists, and the terrorists are listed
in descending order. Both targets confront costs that they want to minimize, while the terrorists
receive benefits that they want to maximize. Terrorists payoffs mi and ni (i = B, T) are not
necessarily known with certainty, so that the terrorists must make an educated choice of target
based on their anticipated gain from success and failure at each of the two potential targets.
We shall focus on the actions of the targets. The business (tourist) target must pay
deterrence costs regardless of the games outcomes; hence, this expense is like an insurance
premium, paid in good and bad states. In Figure 2, the payoffs are depicted so that there is no
collateral damage on tourists at a business venue. There are, however, collateral damage of a or
12
h on business interests when a tourist venue is attacked. That is, a terrorist attack on an airport is
sure to affect tourists and business people, while a terrorist attack on a specific business is
unlikely to harm tourists. Some symmetry of costs is assumed in which a direct attack on a
business or tourist location causes damage of A for a failure and H for a success, where H > A.
For collateral costs to business interests, terrorist success is more costly that failure i.e., h > a.
Based on Figure 2, the expected costs to business from a business attack is:
l(B) = BA + (1 B)H,
(1)
while the analogous costs to tourists from a tourist attack is:

l(T) = TA + (1 T)H.
(2)
The collateral damage from a terrorist attack on business interests is:

v(T) = Ta + (1 T)h,
(3)
while the collateral damage from a business attack on tourist interests is:
v(B) = 0.
(4)
Given the assumption on A, H, a, and h, l(i) decreases as i increases for i = B, T, and v(T)
decreases as T increases, because expected damage falls as terrorist failure becomes more likely.
When acting independently, the expected costs of terrorism to business denoted by CB is:
CB = D(B) + Bl(B) + Tv(T).
(5)
Owing to the absence of collateral damage, the cost to tourists is:

CT = D(T) + Tl(T) + 0.
(6)
A Nash equilibrium corresponds to each target choosing its respective deterrence level to
minimize these expressions while taking the other targets deterrence as given.
To ascertain the relative efficiency of the Nash solution, we must find the social ideal and
compare it with the Nash equilibrium. This ideal is obtained when the deterrence levels are
13
chosen for the two targets to minimize the aggregate cost C:
C = D(B) + D(T) + B(B, T)[l(B)] + T(B, T)[l(T) + v(T)].
(7)
For the business target, the comparison is accomplished in a couple of steps. First, we derive the
first-order condition for minimizing costs to the business target by taking the derivative of CB
with respect to B. This condition includes marginal deterrence costs, the potential harm to
business interests as attacks are diverted to the tourist site, and the marginal benefits of diverting
attacks and limiting damage of a business attack. Second, we minimize social cost, C, with
respect to B. Third, we evaluate these first-order conditions for social cost at the B that satisfies
the Nash equilibrium where CB/B = 0,9 denoted by N . This evaluation leads to just,
B
N
l ( T )
T
>0,
B
since there is no collateral damage on tourists at the business site. This term represents the
external costs that the independent deterrence decision of the business target imposes on tourists
by transferring more attacks to them. This inequality accounts for the potential deterrence race
and implies that business interests independently spend too much on deterrence. Because there
are no tourists to protect at the business venue, there is no opposing external benefits coming
from this deterrence spending.
A different situation characterizes the deterrence decision of the tourist target, because
diversion of a potential attack protects business visitors to the tourist venue in two ways: (1) it
limits the damage to business interests by increasing the likelihood of terrorist failure, and (2) it
makes business interests safer at the tourist site by diverting the attack. To these external
benefits, there is also the external cost of a greater likelihood of attack at the business venue as
the attack is diverted. Thus, whether the tourists Nash equilibrium implies underdeterrence or
overdeterrence hinges on which of these opposing influences dominates.10 Compared with the
14
deterrence choice of the business target where there are no opposing external benefits, the
tourists will either underdeter or overdeter to a smaller extent.
There is also a collective action rationale why tourists may actually underdeter and are
less adept at deflecting attacks than a business target. Business firms or their employees at risk
need only act unilaterally to increase their protection; in contrast, tourists at risk must mount a
collective response (which is highly unlikely) or lobby the government for help. This lobbying
effort is anticipated to take a long time before there is any government response and, in the
meantime, tourists or the public at large remain vulnerable. Moreover, tourist targets are varied
and diffused, while business targets are generally more specific and easier to guard. Tourist
attacks have resulted in better protection at airports, monuments, bridges, and some public
places, but not every location can be equally protected, which results in targets of opportunity for
terrorists.
Next consider what would happen if the two targets were officials and businesses (or the
general public). Now officials are better equipped to solve the collective action problem, since
they can allocate public funds to protect themselves as has been done at US embassies and other
government buildings. Thus, it is no wonder that the smallest number of transnational terrorist
attacks are now against the military and government targets. Both the general public and
businesses face the largest number of attacks (US Department of State, 2002, p. 174). As
alternative targets divert attacks, those least able to do so become the victims.
Deterrence or preemption
As shown in the last section, many terrorism-related games involve at least three players.
Another instance concerns two targeted governments the US and UK that must choose
whether to focus their anti-terrorism policy on deterrence or preemption. Deterrence diverts the
15
attack by making such acts more difficult, while preemption seeks out the terrorists by
eliminating their base of operations and resources. Each player has two choices: each
government can either concentrate on deterrence or preemption, while the terrorists can either
execute a spectacular terrorist event (e.g., 9/11 or the 1998 simultaneous bombings of the US
Embassies in Nairobi, Kenya and Dar es Salaam, Tanzania) or a normal terrorist event.
For a spectacular terrorist event, preemption costs exceed deterrence costs, while, for a
regular terrorist event, deterrence costs exceed preemption costs. The US-led October 2001
attack on the Taliban and al-Qaida in Afghanistan was an effort to preempt future spectacular
events and was extremely expensive. When a government protects against a spectacular event,
intelligence can limit deterrence costs, so that only key sites are afforded increased security.
Deterrence can, however, be quite expensive for normal terrorism, since potential targets
everywhere must be guarded. Because regular events are planned by terrorists with less security
precautions than spectaculars, preemption costs are anticipated to be less costly than protecting
such a target-rich environment. To simplify the mathematics without changing the strategic
aspects of the underlying game, we normalize deterrence costs for spectaculars to 0 and let C be
preemption costs above and beyond deterrence costs for such events. Similarly, we normalize
preemption costs for regular terrorism to 0 and let c be deterrence costs above and beyond
preemption costs for such events.
The three-player deterrence-preemption game is displayed in normal form in Figure 3,
where the US chooses the row, the UK the column, and the terrorist group the matrix. Matrix a
corresponds to a spectacular, whereas matrix b corresponds to a normal terrorist event. In each
cell, the first payoff is that of the US, the second is that of the UK, and the third is that of the
terrorist group. The payoffs depend on the following technologies of deterrence and
preemption. To thwart a spectacular event with certainty, both the US and UK must preempt. If
16
only one country preempts and the other deters, then the event occurs with probability p in the
country doing the preempting. If, however, neither country preempts and a spectacular event
occurs, then it is logistically successful. A best-shot technology of preemption applies to a
normal terrorist event; i.e., preemption by either country is sufficient to make the event fail with
certainty.
Figure 3 about here
To compute the payoffs in Figure 3, we must define a couple more terms: S is the
terrorists payoff for a successful spectacular, and T is their payoff for a successful normal event,
where S > T. Deterrence by a single nation deflects the attack to the other target, while
deterrence by both countries makes the US the target of choice. With the US being the target of
40% of all transnational terrorist attacks, this is a reasonable assumption. In matrix a, if both
countries deter, then the spectacular is successful against US interests, so that the US loses S
(hence, the S payoff), and the terrorist group gains S. Owing to our cost normalization, UKs
deterrence cost is 0. If only one country deters and the other preempts, then the former nets 0
and the latter endures an expected cost of pS C, which equals the expected loss from the
attack and the spent preemption costs. The terrorists receive an expected payoff of pS over and
above the costs of the operation.11 In the case of mutual preemption, the spectacular is averted,
so that the countries only cover their preemption costs of C, while the terrorist group loses the
costs of their operation, L, which may include fallen comrades and wasted resources.
Next, consider the payoffs in matrix b, associated with a normal terrorist attack. Mutual
deterrence will lead to a terrorist attack on the US, whose net payoff is the damage, T, plus the
costs of deterrence, c. With no preemption, the attack is not stopped. The UK loses just its
costs of deterrence, which has shifted the attack to the terrorists preferred target the US. The
terrorists obtain a gain of T, equal for the simplicity to the US losses. When one country
17
preempts and the other deters, the attack is foiled, so that the former nets 0 and the latter pays its
deterrence costs. The terrorists lose their logistical costs of l, where l is less than L, since more
planning and effort goes into a spectacular. Finally, if both countries preempt, then each nets 0
and the terrorists lose their logistical costs.
There are two potential pure-strategy Nash equilibria for this game. For normal events,
preemption is a dominant strategy for both countries because preemption costs are less than
deterrence costs and preemption can remove the threat. Even though only one country needs to
preempt, both have incentive to do so despite the redundancy of effort. When the payoffs in the
lower right-hand cell in matrix b and matrix a are compared for the terrorists, they prefer
planning the normal event. Thus, the lower right-hand cell is a Nash equilibrium. For a
spectacular, the two countries do not necessarily have a dominant strategy, because S is so large
compared with C, we anticipate that (1 p)S > C unless the probability of a terrorist success is
near certainty.12 If, however, this inequality does not hold, then the pure-strategy Nash
equilibrium in matrix a is in the upper left-hand cell since S > T for the terrorists. Given a Nash
equilibrium in matrix a and b, there is also a mixed-strategy equilibrium involving a
randomization of strategies. The existence of an equilibrium in both matrices means that the
failure of the targeted governments to coordinate their preemption policy will mean that a
spectacular will succeed on occasions, despite the huge costs that such events imply. This
outcome accords with the facts, where spectaculars with hundreds of deaths occur about once
every two years (Quillen, 2002a, 2002b; US Department of State, 2002).
The outcome of this game is also descriptive of real-world policy where nations rarely
coordinate their deterrence or preemption decisions. In matrix a, this coordination failure leads
to insufficient preemption so that spectacular events occur, whereas, in matrix b, this
coordination failure results in too much preemption. If the Nash equilibrium is as indicated in
18
matrix a of Figure 3, then observation of deterrence by the terrorists encourages a spectacular
insofar as S > T and pS > L, which holds whether the terrorists observe US or UK deterrence.
If, however, the terrorists only observe preemption by either country, then they require more
information to make the best choice (i.e., pS > l and L < l).
Granting concessions and terrorist types

An unresolved issue in the literature on negotiating with terrorists is the unintended
consequences of increasing violence by conceding to the demands of the more moderate
elements within a terrorist organization. The appeasement of the moderates isolates hard-liners,
thereby leaving an adverse selection of terrorists more inclined to violence. Adverse selection
involves one side of a transaction being more informed than another, which implies asymmetric
information. In the classic example of a used car market, the uninformed buyers reduce their
offers on cars to an average price where many reliable cars are taken off the market, so that a
preponderance of lemons remain (Akerlof, 1970).
Figure 4 about here
Figure 4 displays a model of bargaining between a government (G) and a terrorist group
with moderate (M) and hard-line (H) members in proportion p and 1 p, respectively. Hardliners make demands of H, while moderates make demands of M, where H > M. The
government moves first and makes an offer, , of either M or H to the terrorist group. The
government is uncertain about the actual distribution between hard-liners and moderates; hence,
nature (N) moves first and selects the terrorist groups composition so that the government faces
hard-liners (node GH) in proportion p and moderates (node GM) in proportion 1 p.
Due to the governments lack of information about terrorists, nodes GH and GM are
contained within the same information set, thereby implying that the government cannot tailor
19
one offer to moderates and another to hard-liners. Given H > M, there is an incentive for
moderates to posture as hard-liners, because they are better off receiving an offer of H from the
government, the acceptance of which yields a payoff of H M > 0, as indicated by the thirdfrom-the-left payoff in Figure 4. In contrast, the acceptance on an offer of M gives the
moderates the baseline payoff of zero as their demands are met.
The governments benefits from an agreement (prior to deducting the offer) are B when
hard-liners accept and b when moderates accept, where B > b M and H > b. Although either
terrorist type accepts an offer of H, the government experiences a cost, b H < 0, from appearing
weak when it concedes H to moderate terrorists. If the government offers H to hard-liners, then
the terrorists accept, giving the hardliners a payoff of 0 and the government a net payoff of B
H, which may be positive. When, alternatively, hard-liners reject an offer of M, we assume that
they resort to terrorism and violence. For simplicity, we assume that this terrorism costs hardliners V to commit, while it inflicts damages of V on the government the (V, V) payoffs. We
assume that M H < V, so that hard-liners prefer a terrorist attack to accepting a moderate offer.
Rearranging this inequality makes the definition of a hard-liner more apparent: M < H V
implies that hard-liners are willing to engage in violence at cost V to obtain demand H in lieu of
the moderate concessions. Since moderates are satisfied with M, there is no net benefit to them
or to the government if they reject such an offer, leading to the far-right (0, 0) payoffs.
What kind of offer should a government make? If it concedes a moderate offer, then
hard-liners will reject it, while moderates will accept it. Given the uncertainty over the
composition of the terrorist organization, the governments expected payoff for a moderate offer
is:
pV + (1 p)(b M).
(8)
In comparison, both hard-liners and moderates will accept an offer of H. The expected payoff
20
for the government is:
p(B H) + (1 p) (b H).
(9)
We are concerned when a moderate offer leaves an adverse selection of hard-liner terrorists for
the government to contend with. The government makes a moderate offer only if the expected
payoff in eq. (8) is as least as great as that in eq. (9), which holds for:
(H M)/(V + B M) p.
(10)
If the governments belief that it is facing hard-line terrorists, p, is less than the left-side of eq.
(10), then an adverse selection results, in which moderates are placated and hard-liners resort to
violence. This outcome is contrary to the ultimate goal of the government to end violence.13 A
notable feature of eq. (10) is that the benefits to making a moderate offer, b, do not even figure
into the equilibrium condition.
The possibility of adverse selection increases with hardliners demands, H. Moreover,
this likelihood falls with higher costs of violence, V. As B approaches H in value, so that
governments and hard-liners preferences converge, V becomes the sole determinant of the
adverse-selection equilibrium. This may explain why the Diaspora or state sponsors are essential
in perpetuating violence, even though the government and hard-liners agree on the need for a
solution. Subsidies from outside interests reduce V and lead to an adverse selection that
perpetuates hostilities.
Unanswered questions and future directions

There are many unanwered questions with respect to terrorism, for which game theory
can be fruitfully applied. In terms of noncooperative game theory, there is no true multi-period
analysis of terrorist campaigns, where the terrorist resource allocation is studied over time. The
closest analysis is that of Lapan and Sandler (1993) and Overgaard (1994), where terrorists
21
signal their alleged strength in the initial period, but only a two-period analysis is presented. A
many period investigation is required where the conflict between terrorists and the government
has an unknown (probabilistic) endpoint that is influenced by actions of the adversaries. Ideally,
information must be treated as incomplete or imperfect when investigating the temporal and
strategic aspects of terrorist campaigns.
Another area for study involves the use of differential game theory to examine how
terrorist organizations their personnel and resources are influenced by successful and failed
operations. By applying a differential game framework, the analyst can display the dynamics of
the strategic choices of the terrorists and the government in which the underlying constraints
capture the rate of change over time of resource supplies based on terrorists operations and the
governments policy choices. The genesis and demise of terrorist groups can be analyzed based
on strategic considerations. If, for example, this demise is understood, then governments may
better plan their anti-terrorist policies. Do some policies (i.e., harsh reprisals) actually encourage
recruitment, opposite to the governments intent? This question and others can then be
addressed.
To date, cooperative game theory has not been applied to the study of terrorism. In
contrast to governments that have not cooperated effectively, terrorists have formed elaborate
cooperative networks (Arquilla, & Ronfeldt, 2001). Terrorists share training facilities,
intelligence, operatives, innovations, and logistical methods. This cooperation is motivated by
the weakness of terrorists who must pool resources and knowledge if they are to threaten much
stronger governments. Terrorists often harbor common resentment of governments which unite
their interests. Moreover, terrorists are in repeated interactions with one another, where leaders
have no known endpoints unlike officials in democratic governments whose time horizons are
quite finite. These repeated interactions allow terrorist groups to maintain agreements through
22
trigger tit-for-tat mechanisms that punish defections. A careful cooperative game-theoretic
analysis of terrorist groups can provide some useful insights in assessing the true threat of
terrorism. Terrorists cooperation allows them to prod government defensive measures to
uncover the weakest link, to which they dispatch their best-shot team to create maximum
damage.
Concluding remarks
Strategic interaction between terrorists and governments, among targeted governments,
and among terrorists make game theory an appropriate tool to enlighten policymakers on the
effectiveness of anti-terrorist policies. This article takes stock of past game-theoretic
applications to the study of terrorism. The article also presents novel applications and suggests
some future applications. Since 9/11, academic interest in modeling and studying terrorism is
increasing greatly.
23
Notes
1. The relevant literature includes Lapan and Sandler (1988, 1993), Lee (1988),
Overgaard (1994), Sandler (2003), Sandler and Enders (2004), Sandler and Lapan (1988), Scott
(1991), and Selten (1988).
2. Terrorists high success rate and their ranking of tactics based on risk, time, and
potential confrontation with authorities also support the rationality assumption (Sandler et al.,
1983).
3. At the social optimum, the sum of the two countries deterrence spending is minimized
in order to identify the cooperative outcome.
4. As for an arms race, a PRISONERS DILEMMA applies in a 2 2 representation
(Sandler, 2004).
5. Scott (1989) examines terrorism when the terrorists are uninformed about the type of
government that they confront, but Scott does not consider a signalling equilibrium.
6. This deterrence race is analogous to the problem of the open-access commons, where
mutual action in the form of exploitation of the shared resource leads to a PRISONERS
DILEMMA and a suboptimal Nash equilibrium (Sandler, & Arce M., 2003).
7. Of course, multiple attacks can be easily addressed, but, for simplicity, we assume a
single attack per period.
8. Other scenarios are addressed in Sandler and Lapan (1988). As groups have become
more religious-based over the last two decades, the act itself gives a positive payoff to the
terrorists.
9. For more complex and different scenarios, these steps are displayed in detail in
Sandler and Siqueira (2003).
10. Overdeterrence or underdeterrence depends on the sign of the following composite
24
term:
T v ( TN ) + v (TN )
T
N
+ l ( B ) B ,
T
T
where the first two terms are negative and the third term is positive. If the overall sum is
negative (positive), then there is underdeterrence (overdeterrence).
11. This payoff could be easily changed to pS L with no change in the analysis.
Moreover, a cost less than L could be deducted. Our simple model in Figure 3 only allows the
government to choose between preemption and deterrence. In reality, governments preempt and
deter at the same time. To allow for this possibility, one should view the government strategies
in the model as a greater reliance on deterrence or preemption. Different payoff arrays and
alternative underlying technologies of deterrence and preemption can be incorporated into the
model. A rich number of interesting models and outcomes can be displayed, as noted by
Hirofumi Shimizu.
12. This inequality implies that pS C > S.
13. There is, indeed, nothing in the model that restricts us from setting B equal to V.
25
References
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Atkinson, S. E., Sandler, T., & Tschirhart, J. T. (1987). Terrorism in a bargaining framework.
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CHICKEN. Rapaport, A., & Chaman, A. M. (1969). The game of chicken. In I. R. Buchler and
H. G. Nutini (Eds.), Game theory in the behavioral sciences (pp. 151175). Pittsburg:
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COORDINATION. Watson, J. (2002). Strategy: An introduction to game theory. New York:
W. W. Norton.
Cross, J. G. (1969). The economics of bargaining. New York: Basic Books.
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Enders, W., & Sandler, T. (1993). The effectiveness of anti-terrorism policies: Vectorautoregression-intervention analysis. American Political Science Review, 87, (4), 829
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Enders, W., Sandler, T., & Cauley, J. (1990). UN conventions, technology and retaliation in the
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Islam, M. Q., & Shahin, W. N. (1989). Economic methodology applied to hostage-taking in
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light of the Iran-Contra affair. Southern Economic Journal, 55, (4), 10191024.
Lapan, H. E., & Sandler, T. (1988). To bargain or not to bargain: That is the question.
American Economic Review, 78, (2), 1620.
Lapan, H. E., & Sandler, T. (1993). Terrorism and signalling. European Journal of Political
Economy, 9, (3), 383397.
Lee, D. R. (1988). Free riding and paid riding in the fight against terrorism. American
Economic Review, 78, (2), 2226.
Lee, D. R., & Sandler, T. (1989). On the optimal retaliation against terrorists: The paid-rider
option. Public Choice, 61, (2), 141152.
Overgaard, P. B. (1994). Terrorist attacks as a signal of resources. Journal of Conflict
Resolution, 38, (3), 452478.
PRISONERS DILEMMA. Tucker, A. (1950). A two person dilemma. In E. Rasmussen (Ed.),
Readings in games and economics (pp. 78). Malden, MA: Blackwell, 2001.
Quillen, C. (2002a). A historical analysis of mass casualty bombers. Studies in Conflict &
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Quillen, C. (2002b). Mass causalty bombings chronology. Studies in Conflict & Terrorism, 25,
(5), 293302.
Sandler, T. (1992). Collective action: Theory and applications. Ann Arbor: University of
Michigan Press.
Sandler, T. (1993). Collective action and transnational terrorism. World Economy, 26, (4),
forthcoming.
Sandler, T., & Arce M., D. G. (2003). Pure public goods versus commons: Benefit-cost duality.
Land Economics, 79, (3), forthcoming.
Sandler, T., & Enders, W. (2004). An economic perspective on transnational terrorism.
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European Journal of Political Economy, 20, (1), forthcoming.
Sandler, T., & Lapan, H. E. (1988). The calculus of dissent: An analysis of terrorists choice of
targets. Synthse, 76, (2), 245261.
Sandler, T., & Siqueira, K. (2002). Global terrorism: Deterrence versus preemption.
Unpublished manuscript, University of Southern California.
Sandler, T., Tschirhart, J. T., & Cauley, J. (1983). A theoretical analysis of transnational
terrorism. American Political Science Review, 77, (4), 3654.
Scott, J. L. (1991). Reputation building in hostage incidents. Defence Economics, 2, (2), 209
218.
Selten, R. (1988). A simple game model of kidnappings. In R. Selten (Ed.), Models of strategic
rationality (pp. 7793). Boston: Kluwer Academic Press.
Shahin, W. N., & Islam, M. Q. (1992). Combating political hostage-taking: An alternative
approach. Defence Economics, 3, (4), 321327.
United States Department of State (2002). Patterns of global terrorism. Washington, DC: US
Department of State.
28
Todd Sandler is the Robert R. and Katheryn A. Dockson Professor of International Relations &
Economics, University of Southern California. He has used game theory in the study of
terrorism since 1983. In 2003, he is a co-recipient of the National Academy of Sciences Estes
award for excellence in science for his research on terrorism. Daniel G. Arce M. is the Robert
D. McCallum Distinguished Professor of Economics & Business, Rhodes College. He has
applied game theory in economics and international relations to a wide variety of problems. His
teaching and research interests involve many aspects of game theory.
ADDRESS:
TS: School of International Relations, University of Southern California, Von

Kleinsmid Center 330, Los Angeles, CA 90089-0043, USA; telephone +1 213740-9695; fax +1 213-742-0281; e-mail: tsandler@usc.edu.
DGAM: Department of Economics, Rhodes College, 2000 North Parkway,
Memphis, TN, 38112-1690, USA; telephone +1 901-843-3121; fax +1 901-8433736; e-mail: arce@rhodes.edu.
EU
Preempt
Do not preempt
Preempt
2, 2
2, 4
Do not preempt
4, 2
US
Nash
0, 0
Matrix a: PRISONERS DILEMMA
EU
Preempt
Preempt
6, 2
Do not preempt
Nash
2, 4
Do not preempt
4, 2
0, 0
US
Matrix b: Asymmetric-Dominance Equilibrium
EU
Preempt
Preempt
Nash
2, 2
US
Do not preempt
4, 0
Nash
Do not preempt
0, 4
0, 0
Matrix c: COORDINATION
FIGURE 1. Three alternative game forms for preemption
Targets choose deterrence
D(qB), D(qT)
ss
e
sin
u
kBp
c
ta
qB
1 qB
cc
ee
il
Su
Fa
Fa
il
At
Terrorists decide whom to attack

At
tac
kT
o
1 pB = pT urist
s
qT
Su
cc
1 qT eed
( ) ( ) ( ) ( )
D(qB) + A
D(qT) + 0
mB
D(qB) + H
D(qT) + 0
nB
D(qB) + a
D(qT) + A
mT
FIGURE 2. Deterrence game tree for targets
D(qB) + h
D(qT) + H
nT
UK
UK
Deterrence
Deterrence
US
Preemption
Preemption
S, 0, S
0, pS C, pS
Nash
pS C, 0, pS
Matrix a: Spectacular Event
Deterrence
Deterrence
Preemption
T c, c, T
c, 0, l
US
C, C, L
Nash
Preemption
0, c, l
Matrix b: Normal Event
FIGURE 3. Two-country choice of deterrence versus preemption
0, 0, l
N
1p
GH
Government
GM
W {M, H}
Terrorists
pt
ce
ce
Ac
jec
( ) ( )
V
V
Re
Ac
BW
WH
jec
( )
Re
pt
bW
WM
FIGURE 4. Granting concessions and terrorist types
()
0
0
Policies
Proactive policies
Alternative game forms
Preemption
! PRISONERS DILEMMA, CHICKEN, COORDINATION,

Asymmetric-Dominance Equilibrium
Group infiltration
! Asymmetric-Dominance Equilibrium, PRISONERS

DILEMMA
Retaliation
! PRISONERS DILEMMA, CHICKEN, COORDINATION,

Asymmetric-Dominance Equilibrium
Intelligence
! Asymmetric-Dominance Equilibrium
Reactive policies
Deterrence
! PRISONERS DILEMMA (deterrence race) with action
Embassy fortification
! PRISONERS DILEMMA with action
UN conventions
! PRISONERS DILEMMA in terms of enforcement
TABLE 1. Policy choices and underlying games
TODD
COLLECTIVE ACTION AND TRANSNATIONAL TERRORISM
Original Blackwell Publishing Ltd (a Blackwell Publishing Company)
0
1
6
262003 Article
June
00 2003
0378-5920
The World
TWEC UKEconomy
Oxford,SANDLER
Blackwell Publishing Ltd
Collective Action and

Transnational Terrorism
Todd Sandler
governments inadequate and uncoordinated responses. A wide range nature of transnational terrorism and associated collective action concerns that arise in the aftermath of September 11. Throughout by paper, the strategic interaction between rational terrorists and targeted governments are underscored. light of economic analysis and past econometric evidence.
This paper applies modern tools of economic analysis to examine the of issues are explored including governments deterrence races, undersupplied pre-emption, and suicidal attacks. Myriad substitutions the terrorists limit government anti-terrorism policy effectiveness. A host of policy responses are evaluated inNetworked terrorists draw on their collective strengths to exploit a maximum advantage over targeted
1. INTRODUCTION
N a clear, crisp morning, US peace and security was forever shattered by

four hijackings on 11 September, 2001 (henceforth, 9/11) that resulted in
the collapse of the World Trade Centre (WTC) towers, the destruction of a
section of the Pentagon, and the passenger-induced plane crash on a rural Pennsylvania eld. Within a mere 90 minutes, the potential threat of terrorism and the
vulnerabilities of America became understood by a traumatised public. In todays
technology-based society, an everyday object could be transformed into a weapon of mass destruction (WMD). Apparently, al-Qaida terrorists surpassed their
wildest dreams of robbing Americans of their serenity and security. Their heinous attack captured headlines for months and will continue to do so for years
to come on 9/11 anniversaries or as the perpetrators are brought to justice. By
broadcasting much of the disaster live, including the toppling of the north and
south WTC towers, the media unwittingly assisted in magnifying the potential
risks that modern-day terrorism poses. This heightened state of anxiety probably
induced the anthrax terrorist to act so as to capitalise on the insecurity and
hysteria that had already gripped the nation. That is, the mailing of anthrax letters
was a complementary incident for the 9/11 hijackings, thereby allowing the two
incidents to have a greater inuence than either would have had on its own.
Although those responsible for the two sets of events surely differed, the timing
of the anthrax letters was not coincidental.
The events of 9/11 marked the largest ever terror attack on US soil or
anywhere and resulted in the deaths of just under 3,000 people. The second
largest terrorist attack on US soil had been the bombing of the Alfred P. Murrah
Building in Oklahoma City on 19 April, 1995, where 168 people died, while the
third largest attack had been the bombing of Wall Street on 16 September, 1920,
TODD SANDLER is the Robert R. and Katheryn A. Dockson Professor of International Relations
and Economics at the University of Southern California, School of International Relations. This
paper was presented as a Leverhulme Globalisation Lecture at the University of Nottingham.
Blackwell Publishing Ltd 2003, 9600 Garsington Road, Oxford, OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
779
780
TODD SANDLER
where 34 people died and 200 were injured.1 The Wall Street time bomb, left in
a horse-drawn carriage, had been technologically unsophisticated, similar to the
Murrah building bomb and the 26 February, 1993, bomb at the north tower of the
WTC. The 1993 WTC bombing resulted in a 100 100 foot crater in the underground parking garage (US Department of State, 1994); a slightly different placement of this bomb could have imploded the building with greater loss of life than
9/11. Based on these last two US incidents, we see that terrorism has been a threat
for some time, while mass-casualty terrorism has been tried well before 9/11.
Terrorists bent on mass destruction only have to be fortunate once, while
society must be fortunate daily to avoid such catastrophes.2 Another asymmetry
between terrorists and the targeted society involves resources: society must protect everywhere to be secure, so that homeland security is very expensive, while
terrorists can concentrate their best effort at a single vulnerable point, so that
terrorism is a cost-effective activity. This is well-illustrated by the 1993 bomb of
fertiliser, diesel fuel, and icing sugar at the WTC. Even though this bomb cost
just $400, it caused $550 million in damages (Hoffman, 1998). Yet another asymmetry involves information, in which the terrorists know their own capabilities,
unlike the targeted government, which is not fully informed about the terrorists
resources.
Terrorism is the premeditated use, or threat of use, of extra-normal violence
or brutality to gain a political objective through intimidation or fear of a targeted
audience. To qualify as terrorism, an act must be politically motivated; that is,
the act must attempt to inuence government policy at home or abroad. Incidents
that are solely motivated for prot and do not directly or indirectly support a
political objective are not considered to be terrorism. The political motives of
terrorism are varied and may include Marxism, nihilism, religious freedom,
racism, separatism, anti-capitalism, anti-US dominance, or other goals. Since the
1979 November takeover of the US Embassy in Tehran, some terrorism has
been motivated by the establishment of an Islamic state.3 To create an atmosphere
of fear where everyone feels vulnerable, terrorists simulate randomness when
choosing targets. As the authorities focus on a likely venue, the terrorists often
strike elsewhere at less-watched targets. Frequently, terrorists direct their violence against a large audience, not directly involved with the political decision
that they seek to inuence. On 9/11, the plane that crashed into the Pentagon and
1
On mass casualty bombings since 1946, see Quillen (2002a and 2002b). For Quillen, a bomb
causes mass casualties if more than 24 people die.
2
This asymmetry paraphrases what the IRA terrorists said in a letter after they learned that their
12 October, 1984, bombing of the Grand Hotel in Brighton had narrowly missed killing Prime
Minister Margaret Thatcher. Their letter said, Today, we were unlucky. But remember we have
only to be lucky once. You will have to be lucky always (Mickolus et al., 1989, vol. 2, p. 115).
3
The takeover of the US Embassy in Tehran is a watershed event, which marks the rise of
religious terrorism in recent decades (Hoffman, 1998; and Enders and Sandler, 2000).
Blackwell Publishing Ltd 2003
781
the one that was intended for the US Capitol marked departures from this pattern by targeting decision makers. Extra-normal violence is employed not only to
grab headlines but also to elevate anxiety levels, so that the general population
overreacts to these low probability but high-cost events. As the public becomes
desensitised to the violence, terrorists have escalated the lethality of their attacks.
Terrorism falls into two essential categories: domestic and transnational.
Domestic terrorism is home grown and has consequences for only the host country, its institutions, people, property, and policies. In a domestic terrorist incident,
the perpetrators and targets are from the host country. Through its victims, targets, institutions, supporters, or terrorists, transnational terrorism involves more
than one country. If an incident begins in one country but terminates in another,
then it is transnational terrorism, which would be the case for a hijacking of a
plane in country A that is made to y to country B. The toppling of the WTC
towers was transnational, because victims came from many different countries,
the mission was planned abroad, and the terrorists were foreigners. An incident
may be transnational if its implications transcend the host nations borders.
Transnational terrorist incidents represent transboundary externalities, insofar
as actions conducted by terrorists or authorities in one country may impose
uncompensated costs or benets on people or property of another country. In a
globalised world of augmented cross-border ows, there is a blurring of the
distinction between domestic and transnational terrorism.
When terrorist events have signicant transnational consequences, numerous
collective action concerns arise. Targeted countries may either work at crosspurposes or fail to cooperate to address the terrorist threat. For example, deterrence efforts by two or more countries to deect an attack from the same terrorist
network may create a deterrence race as each country overspends. In some
instances, the deection may result in a countrys people or property being hit
abroad, where the country has little say over terrorism-thwarting efforts. The
absence of cooperation may involve a country single-handedly mounting a
pre-emption on the terrorists and their bases. The purely public benets, derived
from the annihilation of a common terrorist threat, lead to free riding, especially
when a powerful country is anticipated by other targeted countries to act. A
similar retaliators dilemma characterises actions to punish a state-sponsor of
terrorism. Ironically, terrorists ability to form global networks not only solves
their collective action problem but exacerbates the collective action problem for
the target countries.4
The purpose of this paper is to investigate the nature of transnational terrorism
and some of the collective action issues that it poses in the aftermath of 9/11. In
particular, rationality is investigated from alternative viewpoints that include
the terrorist groups leaders, suicide bombers, and the targeted government.
4
On terrorist networks, see Arquilla and Ronfeldt (2001).
782
TODD SANDLER
Additional difculties, associated with the deterrence and pre-emption dilemmas

of targeted governments, are discussed. These governments cooperative failures
are shown to play into the hands of networked terrorists, who utilise their collective strengths to augment these governments inadequate and non-cooperative responses. Other collective action failures on the part of governments that involve
intelligence and duplication of efforts are investigated. Another purpose is to
identify what works and what does not against terrorism. Finally, the costs of
terrorism are addressed for a globalising society.
2. A LOOK AT THE PAST
Table 1 provides a perspective on the nature of transnational terrorist incidents

from data published by the US Department of State (19882002) or else made
available by the Ofce of the Ambassador at Large for Counterterrorism, US
Department of State. The coverage is the 19682001 period, which represents
the era of transnational terrorism, which really began following the Arab-Israeli
conict in 1967 and the subsequent Israeli occupation of captured territory. The
columns in Table 1 indicate the year, the number of transnational terrorist events,
deaths from these events, wounded from these events, and attacks on US interests.
A number of essential insights can be drawn from these numbers. First, with
the exception of 2001, transnational terrorism on average results in relatively few
deaths, especially when compared with the annual 40,000 people killed on just
US highways. In fact, the deaths on 9/11 are approximately equal to all transnational terrorist-related deaths recorded during the 19882000 period. Second,
transnational terrorism follows a cyclical pattern with much of the 1990s being
a relatively calm era.5 Third, attacks on US interests account for a high proportion of events, even though relatively few transnational terrorist incidents took
place on US soil. In 1998 and 2000, there were no such events, while, in 1999,
there was just one such event (US Department of State, 19992001). This is
especially noteworthy from a transnational externality perspective and underscores that US success in deecting attacks abroad has not secured the safety
of US interests. Fourth, some years may represent outliers in terms of deaths,
wounded, or attacks on US interests. For example, a single noteworthy event
known in the terrorism literature as a spectacular may account for a spike in
the number of dead or injured. Obviously, 9/11 is such an event regarding deaths.
In 1998, the simultaneous bombings of the US Embassies in Nairobi, Kenya and
Dar-es-Salaam, Tanzania, accounted for 291 deaths and almost 5,000 injuries
(US Department of State, 1999). The presence of outliers means that statistical
5
The cyclical nature of transnational terrorism is established with rigorous statistical analysis in
Enders and Sandler (1995 and 1999), and Im et al. (1987).
783
TABLE 1
Transnational Terrorism: Events 19682001
Year
Number of Events
Deaths
Wounded
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
348
426
395
274
304
296
440
322
431
363
565
437
375
605
665
612
635
565
497
487
489
499
434
530
419
457
382
394
345
558
264
309
193
125
3,572
405
233
741
221
314
163
314
109
93
102
200
193
407
612
604
825
312
637
128
168
507
697
435
230
409
266
311
121
151
36
127
56
34
612a
791
706
5,952
693
2,652
6,291
663
1,393
636
233
675
397
1,131
2,272
1,717
1,217
967
1,267
755
804
1,062
542
629
404
806
516
879
199
390
225
209
190
207
219
200
169
111
123
73
90
66
88
142
308
197
193
185
149
204
170
133
199
208
159
169
157
215
158
164
139
151
152
177
190
202
110
57
Note:
a
Data on the number of wounded in the WTC attack is not available and, thus, is not part of this gure.
Source: US Department of State, Patterns of Global Terrorism (1988 2002) and tables provided to Todd
Sandler in 1988 by the US Department of State, Ofce of the Ambassador at Large for Counterterrorism.
analysis must take them into account. Fifth, except for the casualty gures, transnational terrorism in 2001 does not appear to be different from other years. This
lack of difference would be conrmed by examining other measures not displayed in Table 1 for example, terrorist modes of attacks, venue for attacks, or
worldwide distribution of attacks. Terrorist modes of attacks include bombings,
kidnappings, assassinations, skyjackings, threats, and other kinds of events.
784
TODD SANDLER
Recent analyses show that the underlying motive behind transnational terrorism has become less driven by Marxist left-wing beliefs and more directed by
religious fundamentalism.6 Of course, a mixture of motives still justify transnational terrorism, but the dominant drivers have changed. With this shift to more
religious-based terrorism has come a greater willingness on the part of terrorists
to cause casualties. For example, religious groups that declare a Jihad or holy
war against another nation consider its people, not just its ofcials, as the enemy
and, thus, legitimate targets. Moreover, religious terrorist groups act out of a
desire to satisfy their own goals (for example, ascent to heaven) rather than to
win favour with an external constituency. Violence may be viewed as a purifying
act, justied for its own sake, so that claims of responsibility or a list of demands
are not issued. Even though the number of transnational terrorist events is generally lower in the post-Cold War era, the greater violence prediction is borne
out by statistical analyses the likelihood of death or injury for each event is
now 17 percentage points greater per incident (Enders and Sandler, 2000).
3. SUICIDE ATTACKS
In recent times, the importance of suicide attacks has increased; 9/11 illustrates the carnage that a suicidal mission can wreak. The presence of suicidal
pilots allowed the planes to be guided into the WTC towers and the Pentagon. A
bomb placed on board these same ights is unlikely to have caused the same
death toll and destruction on the ground. In addition, Hamas use of suicide
bombers against Israeli targets has increased greatly during 2002, thereby augmenting public awareness of such attacks. Suicidal missions are, of course, not
new and can be traced back to Japanese kamikaze pilots during World War II.
Kamikaze planes were loaded with explosives to create maximum damage to
enemy targets such as ships.
One must ponder a rationality argument for suicide bombers. Alternative
explanations have, however, been offered to justify suicide missions. Wintrobe
(2001) characterises suicidal terrorists as rational individuals, who engage in an
extreme trade-off between their autonomy and group solidarity. Wintrobes
simplistic analysis hinges on an individuals desperate search for group acceptance and cohesion as driving a suicidal terrorist into a corner solution, where
group solidarity is more valuable than ones very existence.7 Wintrobe, however,
6
On the changing motives of terrorists, see Hoffman (1997 and 1998), Enders and Sandler (2000)
and Wilkinson (2001 and 2002).
7
Wintrobes (2001) argument bears some similarity to Hardins (1995) One for All theory to
explain the logic of group conict, where the collective action problem can be overcome through
group identity that bolsters individuals self-interest when engaging in extreme behaviour against
members of a hated opponent group. Self-sacrice is not a necessary outcome in Hardins theory.
785
rejects that rewards in heaven can motivate a rational self-sacrice in a suicide

mission.
To show that self-sacrice is rational, one must demonstrate that the utility
associated with the suicidal mission is at least as large as the utility of the status
quo. If the utility of the status quo is sufciently low owing to an absence of
economic opportunities or to a sense of injustice, or if the utility of the suicide
act is sufciently high owing to group approval or other rewards, then a terrorist
may rationally choose the corner trade-off of self-sacrice.
There is no reason to dismiss heavenly rewards as one, but not the only, factor
that can tip the utility comparison in favour of a suicide mission. Compensation
paid by Iraq to the family of Palestinian suicide bombers can also tip the balance,
especially when the status quo offers grim economic realities. If heavenly
rewards, martyrdom, or family compensation are relevant, then an intertemporal
utility comparison is necessary in which the decision maker places value on
postmortem utility. Everyday acts of purchasing life insurance or church attendance suggest the relevancy of postmortem utility in individuals decision calculus. The suicide mission can also be motivated by deceit, where the terrorist is
not told the true nature of the mission. There is some evidence that the two
terrorists, who drove a yellow Mercedes truck full with explosives into the US
Marine barracks at Beirut International Airport on 23 October, 1983, were not
informed about the suicidal nature of their mission (Mickolus et al., 1989, vol. 1).
After setting the bomb to detonate, the bombers jumped from the cab of the
truck and tried to run to safety, but did not get very far. In some instances, the
terrorists may be forced to take the action because of threats made to their family.
Thus, many considerations can induce a terrorist to make the ultimate trade-off,
ending at a corner solution.
While poverty can play a role in limiting the operatives status-quo utility,
there is no reason why poverty must be a factor if group identity or heavens
rewards are large. In a recent study of Hezbollah martyrs, an inverse relationship
between poverty and participation in suicidal missions was found; this is contrary
to what the media say (Krueger and Maleckova, 2002). Hezbollah suicidal terrorists did not tend to be poor nor poorly educated in the sample. The study did
not, however, include the employment opportunities of these suicidal terrorists.8
Education is a necessary, but not a sufcient, condition for obtaining a good job.
Nevertheless, this study suggests that the size of the expected utility from carrying out the suicidal mission may have to be large, insofar as the utility of the
status quo is not necessarily small.
Important participants in suicidal missions who have been left out of the
analysis to date are the terrorist leaders and strategists for example, Osama bin
8
In the case of Israeli Jewish settlers, individuals who attacked Palestinians in the West Bank were
generally from high-paying jobs. These settlers were not on suicide missions.
786
TODD SANDLER
Laden and Ramzi Binalshibh who dispatch terrorists to their death. It is noteworthy that the higher echelon of al-Qaida, Hamas, and Hezbollah do not
sacrice themselves. Their calculus is impeccable they preserve their organisation by employing low-cost resources in the form of dispensable young men (and
sometimes women) to create maximum anxiety in a targeted audience. The
inverse relationship between poverty measures and participation in suicide mission is probably due to these leaders choosing people to carry out the mission
who possess the requisite intelligence for logistical success. Moreover, the attainment of a level of education is a signal of a persons determination to carry
through on commitments. Suicidal missions can create particularly high anxiety
in a targeted society, because a determined suicide bomber can not only mimic
the identity of the target audience (for example, dress like a devout Jew), but can
also create maximum damage by detonating the bomb at the most opportune
moment. Such missions underscore both the determination of the terrorists and
the vulnerability of the targeted audience.
A nal participant is the targeted government, charged with protecting the
lives of its citizens. Suicide missions present a real dilemma to these governments. In general, deterrence policies work best if they can create price changes
associated with terrorist operations that induce terrorists to substitute from more
harmful activities into less harmful ones. The presence of a corner solution
for the terrorist operative and also for the terrorist leader implies that policies
which reduce suicidal missions probabilities of success have no inuence whatsoever on these agents choices (Enders and Sandler, 2003). This then implies
that the government must either apprehend or kill suicidal terrorists for attacks
to stop.
4. COOPERATION FAILURES AND THEIR COSTS
Unlike the governments that they target, terrorists have progressed in solving
their collective action problem. From the early 1970s, terrorist groups engaged
in transnational acts have been tied either explicitly or implicitly to networks
consisting of left-wing terrorist groups united in their goal to overthrow democratic governments (Alexander and Pluchinsky, 1992), Palestinian groups united
in their aim to establish a homeland or to destroy Israel, and fundamentalist
terrorist groups united in their goal to create nations founded on fundamentalist
principles (Hoffman, 1998; and US Department of State, 2001). Terrorist networks cooperate on many levels, including training, nancial support, logistical
help, intelligence, weapon acquisition, pooling resources, and the exchange of
operatives for example, operatives were exchanged in the 21 December, 1975,
attack on the Organisation of Petroleum Exporting Countries ministerial meeting
in Vienna, and in the 27 June, 1976, hijacking of Air France ight 139 (Alexander
787
and Pluchinsky, 1992).9 The al-Qaida network operates in upwards of 60 countries and stages their attacks worldwide. This network includes such groups as
Abu Sayyaf (the Philippines), Egypts Islamic Group, Harakat ul-Mujahidin
(Pakistan), Islamic Movement of Uzbekistan, Al-Jihan (Egypt), and bin Ladens
own group (US Department of State, 2001). Even left-wing groups and Palestinian groups have been known to train together and to have other ties (Hoffman,
1998; and Wilkinson, 1986 and 2001), so that separate networks have explicit
links to one another. These networks common hatred of the United States and
Israel means that heightened attacks by groups in one part of the world can spark
increased attacks in other parts of the world. This implicit coordination shows up
as distinct cycles of peaks and troughs in transnational terrorist activities.10
The ability of terrorists to cooperate heightens the inefciencies associated
with governments inability to cooperate, except episodically for example, in
building the coalition to defeat the Taliban and to attack al-Qaida camps and
bases in Afghanistan. This inability of governments to cooperate is rst illustrated for deterrence and pre-emption.
a. The Deterrence Race
In the top panel of Figure 1, a symmetric deterrence game is displayed for two
countries A and B that are confronted by a common terrorist threat. Suppose
that increased deterrence gives a private, country-specic gain of 6 to the deterring country at a cost of 4 to both countries. For the deterring country, cost arises
from deterrence expense and the increased likelihood of experiencing damages
abroad if the attack is deected there. For the non-deterring country, the cost
stems from the damages that it can suffer from attacks diverted to its soil. If there
is a host-country disadvantage from damages, then this damage can exceed that
of the other country. For simplicity, the damage and deterrence expense of the
deterring country is equated to the damage cost of the non-deterring country
hence, the common cost of 4.
Based on country-specic gains of 6 and the public cost of 4 stemming from
each countrys deterrence, the payoffs listed in panel a arise, where country As
payoff is on the left and country Bs payoff is on the right in each cell. If, for
example, each country increases its deterrence, then each receives 2 (= 6 2
4); if, however, only one country augments its deterrence, then the deterring
country nets 2 (= 6 4) and the other country suffers the spillover cost of 4.
The deterrence game has a dominant strategy since 2 > 4 and 2 > 0, so that
9
These specic incidents are described in Mickolus (1980) under their specic dates. The hijacking of Air France ight 139 is famous because of the eventual storming of the plane at the Entebbe
airport in Uganda by Israeli special forces.
10
See the statistical results in Enders and Sandler (1999).
788
TODD SANDLER
FIGURE 1
Deterrence and Pre-emption Games
the payoffs associated with increased deterrence are larger than the corresponding payoffs associated with the status quo for each of two countries.11 Each
country plays its dominant strategy and augments deterrence, thereby ending up
at the Nash equilibrium of mutual action where payoffs are less desirable than
mutual inaction. The former is a Nash equilibrium, because neither country
would unilaterally want to change its strategy and return to the status quo. The
deterrence scenario in Figure 1 is a Prisoners Dilemma, analogous to an arms
race, where countries spend more but do not necessarily become more secure.
With fanatical terrorists who will not be deterred from attacking some country,
deterrence will not necessarily improve security, especially in a globalised world
where a countrys citizens can be attacked at home or abroad. Thus far, the
deterrence analysis suggests over-deterrence in which each country does not
account for the external cost that their efforts to deect the attack generate for
another country. For this scenario, the greater the number of countries, the
greater the extent of over-deterrence.
11
This analysis of deterrence is analogous to models presented in much greater detail in Sandler
and Lapan (1988) and Sandler and Siqueira (2002).
789
Under-deterrence may characterise the deterrence game for an alternative set

of payoffs. Suppose that a countrys people or property is most vulnerable abroad
owing to secure borders at home. Further suppose that the host country experiences little collateral damage from an attack on its soil. In this case (not displayed in Figure 1), there will be under-deterrence, because the host country will
not account for the external benet that its deterrence confers on foreign visitors,
targeted by host-country terrorists.12
In the general case, the deterrence scenario has both external cost and external
benet. External cost arises as deterrence deects an attack abroad, while external benet stems from either the protection afforded to foreigners or the elimination of an attack altogether. Thus, a wide range of strategic scenarios and results
are possible depending on whether external cost or benet is stronger.
b. Pre-emption Game
In the bottom panel of Figure 1, a canonical pre-emption game is displayed,
in which each of two targeted countries must decide whether or not to launch a
pre-emptive attack against a common terrorist or state-sponsor threat. The preemptive strike is intended to weaken the terrorists or their sponsors, so that they
pose a less signicant challenge. For comparison purposes, payoffs analogous to
the symmetric deterrence game in Figure 1 are chosen. If a sole country preempts, then it confers a public benet of 4 on itself and the other country at a
cost of 6 to just itself. In the off-diagonal cells in the bottom matrix, the country
doing the pre-emption nets 2 (= 4 6), while the free rider receives 4. When
neither country pre-empts, each receives 0, whereas mutual pre-emption gives 8
(= 2 4) in benet at a cost of 6 for a net payoff of 2, as listed, for both
countries. The dominant strategy is not to pre-empt, since 0 > 2 and 4 > 2.
Mutual inaction results in the Nash equilibrium of this Prisoners Dilemma game.
Even though in their most basic form, the deterrence and pre-emption games lead
to Prisoners Dilemma, there are essential collective action differences in these
two collective action problems. First, the Nash equilibrium for the deterrence game
requires mutual action, while the Nash equilibrium for the pre-emption game
requires mutual inaction. Second, the matrix games are negative transposes of one
another, in which the Nash payoffs are more damaging for the deterrence game.13
Third, whereas the deterrence game has both over-deterrence and under-deterrence
12
This scenario characterises the Greek authoritys inability to deter 17 November terrorist attacks
against US, NATO, and other foreign targets in Greece. In the summer of 2002, an accidental
explosion and not clever police work led to the rst arrests of 17 November members. Since
1973, 17 November carried out 146 attacks and murdered 22 people prior to these arrests (Wilkinson, 2001, p. 54).
13
The deterrence game is analogous to the commons problem, while the pre-emption game is
analogous to the pure public good problem (Sandler and Arce, 2002).
790
TODD SANDLER
scenarios, owing to the presence of external cost and benet as the game is
generalised, the pre-emption game involves too little pre-emption owing to the
presence of just external benets. Fourth, deterrence efforts may be complementary, while pre-emption efforts are always substitutable unless a threshold level
of action is required. Thus, increased deterrence by one country should augment
these efforts by the other country, whereas pre-emption actions by one country
should limit these efforts by the other country.
c. A Maximal Externality
The deterrence and pre-emption dilemmas have plagued international efforts
at a coordinated response for the last 35 years from the start of the modern era
of transnational terrorism. The deterrence and pre-emption dilemmas are but two
manifestations of the unwillingness of nations collectively to confront the terrorist
threat. Similar dilemmas involve retaliation against a state-sponsor of terrorism
or the pooling of intelligence. The application of game theory to the study of terrorism
shows that there may be a rational basis for example, the playing of a dominant
strategy for these collective action failures. Nevertheless, one must wonder
why terrorists solve their collective action dilemma, but governments do not.
Governments place great weight on the importance of their autonomy over
national security. Only during times of great threat (such as after 9/11) or war do
nations eschew their autonomy and form tight alliances to present a united front
against an adversary. In contrast, the terrorists are always at grave risks from a
more powerful opponent, so that they have little choice but to pool their limited
resources and rely upon one another. In addition, the terrorists are relatively united
in their hatred of a few countries the United States, Israel, and the United Kingdom.
Countries perceive their risks differently that is, some are worried about being
the target of an attack and others are not and possess economic interests that may
be at odds with addressing the terrorist threat. If, for example, country A has lucrative contracts with a country that helps sponsor terrorism, then country A will not
support hostile actions against this alleged state-sponsor. Moreover, terrorists take
a long-term view of their struggle and consider their interactions with other groups
as continual; in contrast, governments take a short-term view (limited by the election period) of the terrorist threat and do not necessarily consider their interaction
with other governments as continual. As a consequence, the terrorists view the underlying game as innitely repeated, while the governments do not, so that cooperation
becomes a potential solution for the terrorists but not for the government.14
By forming a global network and exploiting targeted countries uncoordinated
responses, terrorists not only limit the effectiveness of these countries efforts to
counter terrorism, but are also able to maximise the externalities (and, hence,
14
On such repeated games and cooperative solutions, see Sandler (1992, Ch. 3).
791
inefciency) that governments impose on one another. Uncoordinated responses

on the part of governments mean that there is a weakest-link vulnerability for the
terrorists to exploit. For example, by not maintaining airport security to an
agreed-upon global standard, some airports present an easier target than others.
Terrorists will probe airport security until these weakest links are uncovered and
then direct attacks there. Such terrorist actions are no different from those of a
virus that seeks out and attacks a more vulnerable host. In a globalised world
where a countrys citizens can be targeted anywhere, the consequences of terrorist cooperation coupled with government non-cooperation is that targets true
level of protection is very small. The external cost imposed by the most inadequate prophylaxis is exacerbated further, because the terrorist network dispatches
its best-shot response in the form of its best placed and trained squad. Hence,
terrorist targets experience the maximal external cost possible, while the terrorists
gain the maximal external benet. This nightmarish outcome continues today.
This combination of collective action success and failure on the part of terrorists and governments, respectively, highlights the unusual challenge that transnational terrorism really poses to the world. Today, a country cannot rely on its
own efforts to ensure its citizens safety. As Table 1 illustrates, the United States
experiences the largest share of transnational attacks even though few occur at
home. So what is the solution? The answer is easier said than accomplished.
Unlike the terrorists, nations must also form a global network to face off against
the terrorist networks. Short of terrorists using WMD, governmental networks on
par with those of the terrorist will not be formed; instead, there will be partial
cooperation for example, sharing of select intelligence.
Ironically, partial cooperation can worsen the inefciency as compared to
non-cooperation. Suppose that countries are deciding whether or not to coordinate efforts on deterrence and intelligence. Further suppose that countries decide
to share intelligence but not deterrence efforts, which is a common outcome.
Among other things, the intelligence provides information as to the terrorists
preferred target that is, which country it wants to attack. Knowledge of terrorists
preferences assists the would-be targets to better deect the attack, so that an
even greater level of over-deterrence results.15 This second-best outcome is not
uncommon in economics when only one of two choice variables is controlled.
5. ANOTHER COLLECTIVE ACTION FAILURE
To date, nations have relied on their own commando forces to address hostage
exigencies at home or abroad involving their citizens. Thus, the United States has
Delta Force, while virtually every EU country maintains its own force. This
15
This outcome is shown mathematically in Enders and Sandler (1995) and Sandler and Lapan (1988).
792
TODD SANDLER
failure to pool resources means that economies of scale are not exploited, so that
the average cost of these squads is much higher than they need be. Moreover,
since each countrys force is dispatched less often when compared with a multicountry force, learning economies, which shift down the average cost per deployment, are not captured. The infrequent use of these commandos means that they
do not acquire the experience to hone their skills in real deployments. Of course,
the presence of parallel forces indicates that efforts are duplicated, which is an
additional waste of resources. Because a squad may have to be dispatched some
distance away to address a hostage mission abroad (for example, Delta Force was
sent to the Mediterranean during the Archille Lauro ship hijacking), a country
must either maintain a network of bases worldwide or else risk the news media
alerting the hostage takers of the commandos travel progress (as CNN did during the Archille Lauro incident). A multi-country squad can establish such a
global network at a more reasonable per country expense than associated with a
single countrys effort. Once again, nations cherish their autonomy and balk at
such cooperative approaches. Countries do not want to obtain other countries permission to deploy such forces during a crisis. Consequently, anti-terrorist efforts
remain expensive and generally independent among nations.
6. IS THE WORLD DIFFERENT AFTER 9/11?
Following the events of 9/11, the world better understands the threat that
transnational terrorism poses. Before 9/11, only 14 transnational terrorist incidents involved more than 100 deaths and none had over 500 deaths (Hoffman,
2002, p. 304). Although the events of 9/11 have dramatically changed our lives
in terms of our risk assessment of terrorism and governments efforts to ensure
our safety, terrorists activities have not altered much because of 9/11. That the
authorities had dismissed the use of a commercial airliner as a murderous bomb
is rather incomprehensible given some earlier events. On 5 September, 1986,
hijackers took over Pan American ight 73, a Boeing 747, at the Karachi airport
with the aim of crashing it into an Israeli city (Mickolus et al., 1989, vol. 2, pp. 4527).
This plan was never executed, because commandos stormed the plane in Karachi
while it was still on the tarmac. The true intentions of the terrorists were revealed
during the 1988 trial of those captured. Another unmistakable omen was the
24 December, 1994, hijacking of an Air France passenger plane in Algiers by Armed
Islamic Group (GIA) terrorists, dressed in Air Algerie uniforms. Their mission
was to crash the Algiers-Paris ight into a crowded area of Paris with great loss
of life. In a stopover in Marseille, a French anti-terrorist commando squad stormed
the plane and killed the four hijackers before they could wreak death and destruction from the sky (Oklahoma City National Memorial Institute for the Prevention
of Terrorism, 2002, website at http://db.mipt.org). Another portentous event was
793
the capture of Ramzi Youssef, the mastermind of the 1993 bombing of the WTC
and an al-Qaida associate, in the Philippines in 1996. At the time of his capture,
he had plans to use a dozen commercial airliners to destroy a variety of targets
including the Central Intelligence Agency (CIA) headquarters in Virginia.
These forerunners to 9/11 indicate that the threat of catastrophic incidents with
massive casualties has been around since 1986. As such, 9/11 marked the day
when the terrorists were very lucky and their target very unlucky. Although 9/11
was a watershed event of transnational terror, given its horrible consequences, it
is better viewed as a reality check than the start of a new type of terrorism.
Annual death tolls will remain like those of Table 1 with deaths well below 1,000
on average in any given year. There has been little change in the pattern of global
terrorism since 9/11, except that the total number of events are somewhat
smaller, but not greatly so, owing to the disruption in al-Qaida operations in
Afghanistan. Given the massive casualties of 9/11, authorities are quite worried
about terrorist use of WMD in the form of chemical, biological, radiological, or
nuclear (CBRN) attacks. Nevertheless, many terrorist experts believe that greater
vigilance should be directed toward conventional methods rather than CBRN
attacks (Hoffman, 2002; and Wilkinson, 2002).
Global efforts to thwart terrorism have only changed marginally. The global
response is still US-led, which is not surprising because US interests remain
the favourite target of international terrorists. As such, the United States gains the
most country-specic benets from their anti-terrorism war. With US actions in
Afghanistan, the Philippines, and Iraq, US interests will continue to attract the lions
share of transnational terrorist attacks. Unlike other countries, the United States
has the power-projection capabilities to move massive forces to troublespots
quickly; as such, the United States affords free-rider opportunities for others.
Although the US-led retaliation against the Taliban on 7 October, 2001, for
harbouring Osama bin Laden involved other nations as allies, the current ght
against terrorist networks is mostly nation driven. Nations still refuse to extradite
terrorists and to integrate their anti-terrorism efforts, except in terms of the sharing of intelligence. Concern for national autonomy still dominates against efforts
to mount a united front against terrorists. Even international actions to freeze
terrorist assets have not progressed much after some initial headway immediately
following 9/11. International cooperation remains a collective action failure
except for a few bright spots for example, the capture in 2003 of an al-Qaida
cell in Spain and US-UK cooperation.
7. WHAT WORKS AND WHAT DOES NOT AGAINST TERRORISM?
One possible recommendation as to what works is to eliminate the causes

of terrorism under the presupposition that, with no grievances or perceived
794
TODD SANDLER
injustices, there will be no terrorism. There are some obvious difculties with
this quick x. If terrorists can extort any political change that they desire by
either threatening or performing violent acts, then democratically elected governments would lose their intended purpose, because the voters choices can be
circumvented by well-armed minorities. Obviously, the legitimacy of a liberal
democracy, whose mandate rests on the protection of lives and property, would
be greatly weakened. Part of these property rights is the ability of duly-elected
ofcials to pursue policies that reect the wishes of the electorate. If governments
seek to correct any claimed injustice, then an aggrieved minority can induce
sizeable redistributions of wealth to them by threatening terrorism unless such
inequities are redressed. Such extortion-based redistributions undermine property
protection. Once terrorists discover a causal link between alleged grievances and
government actions, there will be no stemming the growth of terrorism as a
tactic. Moreover, social discontent is a dynamic factor that is constantly changing; efforts to rectify one social wrong do not eliminate new injustices tomorrow.
In fact, tomorrows injustice may stem from addressing yesterdays injustice.
a. Barriers and Fortications
Given the absence of a simple panacea for transnational terrorism, potential
targets have relied on technological barriers to thwart a particular type of attack.
The installation of metal detectors to screen airline passengers is, perhaps, the
best instance of such barriers. These metal detectors were installed in US airports
beginning 5 January, 1973. Shortly thereafter, these devices were placed in airports worldwide to monitor passengers and their carry-on luggage on domestic
and international ights. Prior to January 1973, skyjackings worldwide averaged
over 16 per quarter or 64 per year. Shortly after metal detectors were installed,
there was an immediate and permanent drop of almost eleven skyjackings per
quarter (Enders et al., 1990a). This is a rather dramatic impact that was longlasting. A similar effectiveness was experienced following the fortication of US
embassies and missions in October 1976: prior to the fortication, there were
about eight attacks per quarter against US diplomatic targets; after the fortication, there were just over three attacks per quarter against US diplomatic targets
(Enders et al., 1990b, Table 2).
But this is not the whole story. When one mode of attack is made more
difcult or expensive to conduct, terrorists have substituted other relatively cheaper
events. If, for example, skyjackings are more difcult due to metal detectors, then
other hostage-taking events are now relatively cheaper. Similarly, recent efforts
to secure commercial airliners from terrorists attempts to use them as massive
bombs will induce terrorists to look to the use of cargo planes to accomplish such
missions. If the effectiveness of an anti-terrorism policy is to be analysed properly, then its inuence on other related modes of attack must be investigated.
795
When the impact of metal detectors is examined more closely, these detectors
are seen to decrease skyjackings and threats, but to increase other kinds of
hostage incidents and assassinations, not protected by the detectors. For example,
Enders and Sandler (1993, Table 4) show that the installation of metal detectors
in 1973 is associated with 14 fewer skyjackings per quarter, and almost 12
additional hostage incidents per quarter (not involving planes) and 7 more assassinations per quarter. Enhanced embassy security, while effective at reducing
embassy attacks, had the unintended consequence of increasing assassinations of
diplomatic and military personnel when they left secured compounds. This substitution is toward events that are more costly to society than those being protected. This outcome suggests that piecemeal policy, in which a single attack
mode is considered when designing anti-terrorism action, is inadequate. Terrorist
substitution among attack modes must be anticipated. Policies that decrease
terrorist resources are particularly effective, because they should result in an
across-the-board decrease in attacks.
Even when barriers and fortications work and do not cause more costly
substitutions, the authorities must be ever-vigilant to outguess the next terrorist
innovation. There is, thus, a dynamic concern with such barriers and fortication,
which are static inhibitors that invite the terrorists to invent novel circumventions. Hence, plastic guns replaced metal ones and bottles of inammable liquids
replaced hand grenades, because these innovations can pass undetected through
metal detectors. Not only have the authorities failed to second guess the terrorists, but the authorities have been slow to respond to innovations. Media accounts
of innovations allow terrorists to rapidly adopt the breakthroughs of others, making such innovations pure public goods.
b. What Kinds of Substitutions Are There?
Thus far, substitutions among attack modes have been stressed. Another type
of substitution is across countries. As discussed earlier, more secured borders
deect attacks elsewhere. Terrorist attacks aimed at foreign direct investment
inuence the ow of capital and cause investors to transfer their capital to countries, where terrorist risks are smaller (Enders and Sandler, 1996). Thus, substitutions may characterise different agents associated with the terrorism problem.
If, analogously, terrorist attacks put tourists at risk, then tourism may be negatively impacted (Enders et al., 1992), as in the case of the hijacking on TWA
ight 847 on 14 June, 1985. This ight departed Athens enroute for Rome with
145 passengers and 8 crew before it was rst diverted to Beirut. This protracted
hijacking was not resolved until 30 June 1985, with the release of the remaining
39 hostages (Mickolus et al., 1989, vol. 2, pp. 2215). Greek tourism suffered
greatly as tourists chose alternative holiday venues, because this hijacking and
others exposed security weaknesses at the Athens airport.
796
TODD SANDLER
An intertemporal substitution may involve terrorists timing of incidents. For

example, a retaliatory raid by a targeted government may unleash a wave of
terrorist incidents against the retaliator(s) as terrorists move events planned for
the future into the present to protest the raid (Enders and Sandler, 1993). Later
terrorism may temporarily decline as terrorists replace expended resources. Consequently, the news media may mistakenly view the temporary lull as a positive
result from the raid. These and other substitutions (for example, terrorists changing their target of opportunity from business people to tourists, as the former
acquire bodyguards) highlight the interdependency of decisions of terrorists and
authorities. If the analysis or policy is too focused, then important consequences
and trade-offs will be missed.
c. Evaluation of Other Policies: Domestic Laws, International Conventions,
and Retaliation
When dealing with domestic crime, nations have instituted laws with stiff
punishments in the hopes of deterring crime by making would-be criminals
weigh the consequences of their contemplated actions. If the society has the
police force to bring criminals to justice and courts to impose harsh sentences,
then offences may be reduced. Similar reasoning may persuade governments to
rely on domestic laws and international conventions to curb transnational terrorism. Unfortunately, the anti-terrorism effectiveness of such laws and conventions
are very disappointing, as shown by past empirical investigations. For example,
the so-called Reagan get-tough laws with terrorism (Public Law (PL) 98-473 and
PL 98-553 signed by President Reagan in October 1984) were shown to have
no statistical effect whatsoever against US-directed terrorist acts (Enders et al.,
1990a and 1990b).
PL 98-473 requires up to life imprisonment for individuals taking US hostages
either within or outside of the United States. This law also raised penalties for
destroying aircraft or placing a bomb aboard an aircraft. PL 98-553 authorises
the US Attorney General to pay rewards for information leading to the apprehension or conviction, inside or outside the United States, of terrorists who targeted
US interests (Pearl, 1987, p. 141; and Mickolus et al., 1989, vol. 2). These laws
failed to deter terrorism for a number of reasons. First, because most terrorist acts
against US people or property occur abroad, the United States must rely on
foreign governments to extradite criminals, which for capital offences is highly
unlikely. Second, by staging their events abroad, terrorists greatly discount the
ability to be brought to justice. US successes in capturing terrorists abroad have
been sufciently few in number prior to 9/11 that there has been little inuence
on terrorists anticipated probabilities of being brought to US justice. Third,
fundamentalist terrorists, who are prepared to make the supreme sacrice, are
undeterred by policy-induced marginal changes in risks.
797
Over the years, nations have formed international conventions and resolutions
to thwart terrorist acts. Two early instances include the 1971 Montreal Convention on the Suppression of Unlawful Acts against the Safety of Civil Aviation
(Sabotage) and the 1977 UN General Assembly Resolution 3218 on the Safety
of International Civil Aviation.16 Although well-intended, neither of these
treaties appeared to have much effect on aviations safety from terrorism. Other
signicant anti-terrorism treaties include the following: the UN Convention on
the Prevention and Punishment of Crimes against Internationally Protected
Persons, Including Diplomatic Agents (adopted by the United Nations on
14 December, 1973), the UN Security Council Resolution against Taking Hostages
(adopted by a 15-0 vote on 18 December, 1985), the UN General Assembly
Resolution 2551 on the Forcible Diversion of Civil Aircraft in Flight (adopted
on 12 December, 1969), the Hague Convention on the Suppression of Unlawful
Seizure of Aircraft (adopted on 16 December, 1970), and the UN General
Assembly Resolution 2645 on Aerial Hijacking (adopted on 25 November,
1970). Conventions are more binding than resolutions, since resolutions are
merely agreements in principle and do not imply any real commitment on the
part of the adopters. Conventions, in contrast, require that the nations rely on
their own judicial system to implement and enforce the agreement. But in neither
case is there a central enforcement agency that can force the nations to comply.
Without such an enforcement mechanism, signatories will do what is convenient
from their viewpoints a Prisoners Dilemma is apt to underlie the pattern of
payoffs, not unlike the pre-emption or deterrence games.
When the average number of attacks is examined both before and after the
adoption of these conventions and resolutions, there is no statistically signicant
reduction in the post-treaty number of attacks for the relevant attack modes
(crimes against protected persons or skyjackings) (Enders et al., 1990a). This is
convincing evidence that these UN conventions and resolutions really had no
impact. To acquire the requisite support from the world community, these antiterrorism treaties were drafted so as to permit too many loopholes and too much
autonomy on the part of the signatories. A more effective treaty-making process
involved neighbouring nations agreeing to control a common terrorism problem
that presented signicant and localised effects. Thus, Spain and France have
made progress in concerted efforts to control Basque terrorism.
Prior to the US war on terrorism, retaliatory raids had very little long-run
impact on terrorism. One study examines the impact that Israeli retaliatory raids
had following signicant terrorist incidents (Brophy-Baermann and Conybeare,
1994). Retaliations investigated included the raid on Palestine Liberation Organisation (PLO) bases in Syria following the Black September massacre of Israeli
athletes during the 1972 Olympic Games; the attack on Palestinian guerrilla
16
See Alexander et al. (1979) for the text of the treaties on the suppression of terrorist acts.
798
TODD SANDLER
bases in Lebanon following a March 1978 Haifa bus hijacking; and the bombing
of Palestinian bases in Lebanon following a June 1982 assassination attempt
against the Israeli ambassador in London. This study nds that such raids only
temporarily suppressed terrorism: within three quarters, terrorism had returned to
its old mean values. Another study shows that the US raid on Libya in 1986 had
the unanticipated consequences of actually raising the level of terrorism in the
immediate aftermath as terrorists lashed out against the United States and the
United Kingdom (Enders and Sandler, 1993). Within a matter of months, terrorism was back to its old level.
The long-run effectiveness of the US-led retaliation against al-Qaida will not
be known for years to come. Nevertheless, some conclusions seem self-evident.
Given the sustained level of attack against al-Qaida and the unprecedented (but
still modest) international cooperation, US-led actions to suppress international
terrorism will be longer lived than in the past. The al-Qaida network has not only
lost signicant assets (for example, training camps, safe and inaccessible havens,
and key strategists), but it has also had linkages within the network disrupted.
Grievances against America will surely worsen, because of US actions, so that
attacks have been returning as the network recongures itself. It is, however,
anyones guess as to the future effectiveness of a recongured al-Qaida compared with its capabilities prior to 7 October, 2001.
d. No-negotiation Strategy
One of the four pillars of US anti-terrorism policy is never negotiate and
capitulate to hostage-taking terrorist demands. The logic behind this policy is that
if a nation adheres to this stated no-negotiation policy, then would-be hostage
takers would have little to gain. For the policy to work, the nation must preserve
its reputation (Lapan and Sandler, 1988). Virtually every nation that confronts
terrorism has, at times, violated its pledge never to negotiate with hostage takers.
The Reagan administrations barter of arms for the release of Rev. Benjamin
Weir, Rev. Lawrence Jenco and David Jacobsen during 1985 6 is a violation of
this pledge that resulted in the Irangate scandal (Mickolus et al., 1989, vol. 2).
Even Israel, the staunchest supporter of the no-negotiation strategy, has made
notable exceptions in the case of the school children taken hostage at Maalot in
May 1974, and during the hijacking of TWA ight 847.17 The effectiveness of
the conventional policy never to negotiate with terrorists hinges on a number of
crucial implicit assumptions. First, the governments pledge is completely credible to would-be hostage takers. Second, there is no uncertainty concerning payoffs. Third, the terrorists gains from hostage taking only derive from ransoms
17
These events are described in Mickolus (1980, pp. 4534) and Mickolus et al. (1989, vol. 2,
pp. 21925).
799
received. Fourth, the governments expenditures on deterrence are sufcient to

deter all attacks. Each of these assumptions is tenuous in practice.
If the terrorist group realises a net gain from a negotiation failure, as it may
if it values media exposure or martyrdom, then the governments proclamations
and its level of deterrence cannot necessarily forestall an attack, so that hostages
are abducted. Once hostages are taken, the government must weigh the expected
costs of not capitulating against those of capitulating. Conceivably, the government may view the cost of not capitulating as too high for the right hostage, even
when accounting for lost reputation. In such situations, the government reneges
on its pledge. If would-be hostage takers believe that they can impose costs
sufcient for a targeted government to renege on its stated policy, then they will
abduct hostages, because the credibility of the governments pledge depends on
an uncertain outcome. Each time a government caves in, the terrorists will update
or raise their beliefs about future capitulations. That is, learning based on past
actions allows terrorists (and the governments) to update their beliefs in an interactive fashion. When a government reneges and negotiates, it emboldens terrorists to take additional hostages. In so doing, a capitulating government imposes
a public bad on future domestic governments and on governments worldwide.
Constitutional constraints or congressional hearings, which impose huge costs on
these ofceholders who capitulate, may be only means of raising the cost of
capitulation sufciently to make a precommitment never to negotiate a policy
without regrets, once hostages are captured. Such actions would severely restrict
discretionary action for the good of the world community.
8. WHAT ARE THE ECONOMIC COSTS OF TERRORISM?
Given the annual number of people murdered by international terrorism, the

associated security spending may appear excessive. President Bushs proposed
budget for 2003 earmarks $37.7 billion to homeland security, which represents
an $18.2 billion increase over 2002 (www.whitehouse.gov). This expenditure
does not include the tens of billions spent to bring down the Taliban in Afghanistan and smash al-Qaidas operations there. One must wonder how many of the
40,000 lives lost each year on US highways would be saved if some of this
money went to making US highways safer. If lives lost are the only consideration, then clearly margins have not been equated and more lives can be saved by
a reallocation of spending. There is, however, the all-important political benet
from the security outlay that the government appears in control. When this security perception is achieved, there is the psychological benet derived by a traumatised public from feeling safer. This security benet is difcult to evaluate,
but is certainly very high. The perception of security is arguably more important
than the reality for such a political benet.
800
TODD SANDLER
Homeland security is expensive, because terrorists force governments to

protect myriad targets, insofar as an attack can take place almost anywhere. Highprole targets bridges, monuments, government buildings, and public places
receive the most security. Deterrence expenditure is an insurance payment that
must be paid regardless of the outcome that is, it is not refunded when no
terrorist attack ensues. Unfortunately, the enhanced security may not be all that
effective despite great efforts, because the terrorists will merely look for a lesswatched alternative target. If the attack is diverted to where both the symbolic
value and lives lost are more limited, then there is a return on the deterrence
investment. Of course, the alternative of doing nothing would just mean that the
terrorists would succeed with the most damaging attack as they did on 9/11.
After 9/11, the stock markets took a precipitous drop owing to the initial
shock, associated uncertainty, and dire consequences to select industries. Many
people viewed this tremendous loss in equity values as a new cost to terrorism.
Prior to 9/11, the economic cost from terrorism was documented in two areas:
reduced foreign direct investment for small countries and reduced tourism.18 The
attacks on 9/11 suggest that equity cost may be great. While there is no question
that some industries (for example, the airline and travel industries) suffered
greatly, the interesting thing about 9/11 is that the drop in equity prices was
temporary, with most stocks rebounding rather quickly in the ensuing months.
A single act of terrorism, or even a sustained campaign, cannot really destroy
condence in an intricate and diversied economy as that of the United States or
the global community. A massive attack can, however, temporarily shake
condence and cause stock prices to drop. An instructive exercise is to compare
the impact on stock values of corporate fraud, as characterised by Enron and
World.com, with the impact on these values of 9/11. With corporate fraud, equity
prices have remained depressed for months and months, because corporate fraud
strikes at the very condence needed to hold equity shares.
9. CONCLUDING REMARKS
Modern-day transnational terrorism taxes the ingenuity of governments worldwide. Countries can limit their exposure at home by relying on barriers, fortication, and intelligence; but this protection comes at a great cost and will never
make a society invulnerable. Given the pervasive transnational externalities associated with todays terrorism, the real global challenge relates to the need for
greater international cooperation among governments that are loath to sacrice
autonomy. Cooperation is required in terms of deterrence, pre-emption, intelligence, and punishment of terrorists. Because these decisions are interdependent,
18
These losses are documented in Enders and Sandler (1996) and Enders et al. (1992), respectively.
801
partial or piecemeal cooperation may achieve little. Not all of the associated
externalities are negative, so that governments may engage in too much of some
terrorism-thwarting activities and too little of others. Consequently, global action
and inaction may be problematic at times. As long as governments place more
weight on their autonomy than on their effectiveness in confronting this common
exigency, terrorists will succeed in maximising their effectiveness while limiting
the effectiveness of the targeted governments. The entire dilemma has been made
worse, because terrorists have successfully addressed their collective action problem through the formation of networks, while governments have not.
No matter the ultimate fate of al-Qaida, transnational terrorism will remain a
threat. In the 1980s, the Abu Nidal Organisation was the most feared group, but
now it poses a much diminished threat, especially with the death of Abu Nidal
in Iraq during 2002. Dangerous groups will come and go, but terrorism will stay.
More worrying, terrorists will continue to innovate and devise ghastly plots that
will some day exceed the horrors of 9/11. Over the years, the escalation of the
terrorist spectacular in terms of carnage reects the need of the terrorists to
shock, in order to capture headlines that publicise their cause. In addition, terrorists will continue to exploit technological innovations, such as the Internet, to
their advantage. But the authorities can also exploit these technologies to the
terrorist disadvantage by, for example, tracking their messages and disrupting
their websites. Globalisation, and the increase in cross-border ows that it entails,
will not only make it more difcult to protect against terrorism, but it will also
create more vulnerable choke points that terrorists can exploit to adversely affect
international commerce.
REFERENCES
Alexander, Y. and D. Pluchinsky (1992), Europes Red Terrorists: The Fighting Communist
Organizations (Frank Cass, London).
Alexander, Y., M. A. Browne and A. S. Nanes (1979), Control of Terrorism: International Documents (Crane Russak: New York).
Arquilla, J. and D. Ronfeldt (2001), Networks and Netwars: The Future of Terror, Crime, and
Militancy (RAND: Santa Monica, CA).
Brophy-Baermann, B. and J. A. C. Conybeare (1994), Retaliating against Terrorism: Rational
Expectations and the Optimality of Rules versus Discretion, American Journal of Political
Science, 38, 1, 196 210.
Enders, W. and T. Sandler (1993), The Effectiveness of Antiterrorism Policies: A VectorAutoregression-Intervention Analysis, American Political Science Review, 87, 4, 82944.
Enders, W. and T. Sandler (1995), Terrorism: Theory and Applications, in K. Hartley and
T. Sandler (eds.), Handbook of Defense Economics, Vol. I (North-Holland, Amsterdam),
213 49.
Enders, W. and T. Sandler (1996), Terrorism and Foreign Direct Investment in Spain and Greece,
KYKLOS, 49, 3, 331 52.
Enders, W. and T. Sandler (1999), Transnational Terrorism in the Post-Cold War Era, International Studies Quarterly, 43, 1, 145 61.
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Enders, W. and T. Sandler (2000), Is Transnational Terrorism Becoming More Threatening? A

Time-Series Investigation, Journal of Conict Resolution, 44, 3, 30732.
Enders, W. and T. Sandler (2003), What Do We Know about the Substitution Effect in Transnational Terrorism?, in A. Silke and G. Ilardi (eds.), Researching Terrorism: Trends, Achievements, Failures (Frank Cass, Ilford, UK, forthcoming).
Enders, W., T. Sandler and J. Cauley (1990a), UN Conventions, Technology and Retaliation in
the Fight against Terrorism: An Econometric Evaluation, Terrorism and Political Violence, 2,
1, 83 105.
Enders, W., T. Sandler and J. Cauley (1990b), Assessing the Impact of Terrorist-Thwarting
Policies: An Intervention Time Series Approach, Defence Economics, 2, 1, 118.
Enders, W., T. Sandler and G. F. Parise (1992), An Econometric Analysis of the Impact of
Terrorism on Tourism, KYKLOS, 45, 4, 53154.
Hardin, R. (1995), One for All: The Logic of Group Conict (Princeton University Press, Princeton,
NJ).
Hoffman, B. (1997), The Conuence of International and Domestic Trends in Terrorism, Terrorism and Political Violence, 9, 2, 115.
Hoffman, B. (1998), Inside Terrorism (Columbia University Press, New York).
Hoffman, B. (2002), Rethinking Terrorism and Counterterrorism Since 9/11, Studies in Conict
& Terrorism, 25, 5, 303 16.
Im, E. I., J. Cauley and T. Sandler (1987), Cycles and Substitutions in Terrorist Activities: A
Spectral Approach, KYKLOS, 40, 2, 238 55.
Krueger, A. B. and J. Maleckova (2002), Education, Poverty, Political Violence and Terrorism:
Is There a Causal Connection?, NBER Working Paper 9074 (National Bureau of Economic
Research).
Lapan, H. E. and T. Sandler (1988), To Bargain or Not to Bargain: That Is the Question, American Economic Review, 78, 2, 16 20.
Mickolus, E. F. (1980), Transnational Terrorism: A Chronology of Events 19681979 (Greenwood
Press, Westport, CT).
Mickolus, E. F., T. Sandler and J. M. Murdock (1989), International Terrorism in the 1980s: A
Chronology of Events, 2 vols. (Iowa State University Press, Ames, IA).
Oklahoma City National Memorial Institute for the Prevention of Terrorism (2002), website
http://db.mipt.org
Pearl, M. A. (1987), Terrorism Historical Perspective on US Congressional Action, Terrorism,
10, 2, 139 43.
Quillen, C. (2002a), A Historical Analysis of Mass Casualty Bombers, Studies in Conict &
Terrorism, 25, 2, 279 92.
Quillen, C. (2002b), Mass Casualty Bombings Chronology, Studies in Conict & Terrorism, 25,
5, 293 302.
Sandler, T. (1992), Collective Action: Theory and Applications (University of Michigan Press, Ann
Arbor, MI).
Sandler, T. and D. G. Arce (2003), Pure Public Goods versus Commons: Benet-Cost Duality,
Land Economics, 79, 3 (forthcoming).
Sandler, T. and H. E. Lapan (1988), The Calculus of Dissent: An Analysis of Terrorists Choice
of Targets, Synthese, 76, 2, 245 61.
Sandler, T. and K. Siqueira (2002), Global Terrorism: Deterrence Versus Preemption Games,
Unpublished Manuscript (University of Southern California, Los Angeles, CA).
United States Department of State (various years), Patterns of Global Terrorism (Washington, DC,
US Department of State).
Wilkinson, P. (1986), Terrorism and the Liberal State (rev. ed., Macmillan, London).
Wilkinson, P. (2001), Terrorism Versus Democracy: The Liberal State Response (Frank Cass,
London).
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Wintrobe, R. (2001), Can Suicide Bombers Be Rational?, Unpublished Manuscript (University of
Western Ontario, London, Ontario).
TOO MUCH OF A GOOD THING? THE PROACTIVE RESPONSE DILEMMA
by
Peter Rosendorff and Todd Sandler

Office Phone: 213-740-9695
Office Fax: 213-742-0281
Home Fax: 323-256-7900
bpeter@usc.edu
tsandler@usc.edu
Final Revision: June 2004
AUTHORS NOTE: Rosendorff is the Director of the Center for International Studies and
Associate Professor of International Relations and Economics. Sandler is the Robert R. and
Katheryn A. Dockson Professor of International Relations and Economics. Both authors are also
members of the Department of Economics. Both acknowledge research support from the Center
for International Studies, University of Southern California. The authors have profited from
comments provided by an anonymous referee, Barry ONeill, Geoffrey Heal, and Bruce Russett
on an earlier draft.

Abstract
This paper presents a two-player proactive response game: the targeted government first
chooses its measures to weaken the terrorists, and the terrorists then choose the type of event
normal or spectacular whose outcome is dependent on proactive responses and nature. Unlike
previous analyses, proactive policy has a downside by increasing grievances and, consequently,
terrorist recruitment. If the government responds too harshly, its actions can empower the
terrorists by providing a larger constituency. Aggressive antiterrorist actions, encouraged by a
high perceived loss from terrorism and low marginal proactive costs, may result in spectacular
events with dire consequences. If spectaculars are transferred abroad to soft targets, then
proactive operations may be excessive from a global viewpoint as external costs are ignored.
The analysis explains why some target nations engage in a modest level of offense, while a
prime target chooses a large level.
Keywords: proactive measures; terrorist recruitment; externalities; noncooperative games;

international cooperation; terrorist spectaculars.

Since 9/11, there is an enhanced interest in applying theoretical and statistical modeling
to examine terrorism (see, e.g., Azam forthcoming; Blomberg, Hess, and Weerapana 2004;
Bueno de Mesquita 2004; Heal and Kunreuther 2004; Li and Schaub 2004; Sandler and Enders
2004). Models are also being applied to investigate the effectiveness of alternative
counterterrorism policies (Arce and Sandler 2004; Enders and Sandler 1993, 1995; Sandler and
Arce 2003). Countermeasures to the threat of terrorism fall into two categories: defensive and
proactive measures. Defensive policies include hardening targets, installing technological
barriers, securing borders, deploying sky marshals, and issuing identity cards. Often such
actions deflect the intended attack to a softer target, thereby creating collateral damage. In
contrast, proactive actions involve direct strikes against a terrorist group or its assets, retaliation
against a state sponsor (e.g., a country providing a safe haven), gathering intelligence,
assassinating terrorists, or infiltrating a terrorist group. These proactive policies are intended to
weaken a terrorist group or compromise its security for the purpose of limiting and ultimately
ending the groups operations.
Proactive tactics against a terrorist group for example, the US-led attack in Afghanistan
against the Taliban and al-Qaida or Israels assassination of Hamas terrorists (Sheikh Ahmed
Yassin and Abdel Aziz Rantisi) in 2004 are characterized in the literature as a pure public
good, because a weakened terrorist group poses less of a threat to all potential targets (Sandler
2003; Sandler and Siqueira 2003; Sandler, Tschirhart, and Cauley 1983). For international
terrorism, such benefits are received by all targeted countries and do not diminish when shared
by more at-risk countries. As a transnational pure public good, a proactive response is
anticipated to be undersupplied because the provider does not include the marginal benefits
conferred on other likely targets when deciding its provision level.
2
At the international level, a proactive response is anticipated to be taken by the prime
target of terrorist attacks, insofar as this nation derives greater benefits from such actions (Arce
and Sandler 2004). Given that 40% of transnational terrorist attacks are against US people or
property,1 the United States has understandably provided the most proactive measures against the
al-Qaida network after 9/11. During fiscal year 2004, the United States allocated almost $53
billion to combating terrorism with defensive measures accounting for $23.9 billion (US General
Accounting Office 2004). Much of the rest went to proactive efforts of the Department of
Defense and other US departments and agencies.2
Proactive operations that bomb alleged terrorist assets, hold suspects without charging
them, assassinate suspected terrorists, curb civil freedoms, or impose retribution on alleged
sponsors may have a downside by creating more grievances in reaction to heavy-handed tactics
or unintended collateral damage. Such operations can lose government support and thereby
empower terrorists through more favorable world opinion and a larger constituency.
Consequently, proactive measures may promote recruitment to the terrorist network, thus
offsetting some of the favorable effects. At the transnational level, recruitment represents a
public bad that may impact countries differently depending on their relationship with the
proactive country. This recruitment depends not only on the terrorist success in an event, where
success encourages recruitment, but also on the nature of the event i.e., a normal event with a
modest impact or a spectacular event with a high death toll or a symbolic nature. Spectaculars
grab headlines and remain in the publics consciousness long after the event. The term
spectaculars is used officially and in the literature to describe influential terrorist attacks. Such
events further recruitment to the terrorist group.
The purpose of this paper is to analyze a governments proactive decision when it may
not only harm the terrorist group by limiting its ability, but also help the group attract recruits
3
and legitimacy. This tradeoff epitomizes the liberal democratic dilemma in responding to a
terrorist threat a government that responds by too little appears unable to protect its citizens
and loses popular support, while a government that responds by too much appears tyrannical and
encourages opposition (Wilkinson 2001). Major proactive campaigns may actually promote
large-scale or newsworthy spectaculars if the recruitment consequence of repressive actions is
sufficiently strong; thus, too much reliance on offensive actions may result in a disastrous
outcome. Because such spectaculars can occur anywhere owing to the globalization of terrorism,
the collateral damage from excessive measures may take place half a world away from the nation
whose actions incited the grievance and recruitment. As such, proactive operations are best
understood as generating both public benefits and costs. A secondary, but related, purpose is to
contrast the US approach following 9/11 with that of the European Union (EU). The former tries
to eliminate the terrorist risk through a war on terror, while the latter manages the risk with
greater reliance on defensive actions.
BASIC GAME SET UP

The underlying game is played by two players: a target government (E) and a terrorist
group (T). In Figure 1, the game is displayed with the corresponding payoffs at the games four
possible outcomes. The target government moves first and chooses a proactive level, [1, ) ,
followed by the terrorists who choose the type of attack spectacular (s) or normal (n). Nature
then determines the outcome based in part on the proactive response. The cost of proactive
measures is P ( ) , where the marginal cost is positive. For simplicity, P ( ) is assumed to
equal p , where p > 0. Spectaculars are major newsworthy terrorist events with either a high
death toll or a watershed character (e.g., the 1972 Munich Olympic attack on the Israeli athletes),
4
while normal events are all other terrorist incidents. Even though just six people died, the 1993
bombing of the World Trade Center was a spectacular event, because over 1000 people were
injured, it caused over $500 million in damages, it struck a major landmark, and its remains in
the news over a decade later. The downing of an airliner or an armed massacre at an
international airport (e.g., the armed attack at Viennas Schwechat and Romes Fiumicino
Airports on 27 December 1985) are also spectaculars with lasting impacts. Although
spectaculars yield a higher payoff to the terrorists than a normal event, spectaculars have a
smaller success probability, s ( ) , than a normal event, whose success probability is n ( ) .
In particular, we assume that n = 1 and s = 1 ( r ) , where r > 1 so
n > s.
At the four endpoints in the game tree of Figure 1, the payoffs of the government and the
terrorists are displayed with the governments payoffs listed above those of the terrorists. If a
spectacular is successful, then the government loses both S and the cost of its proactive response.
The cost of a proactive measure is analogous to an insurance premium, paid in all states of the
world; thus, P ( ) is part of the governments loss in all four outcomes. For successful
spectaculars, the terrorists gain S plus a recruitment benefit of css , positively dependent on the
proactive effort. The marginal recruitment benefit from a successful spectacular is css .
Although the terrorists gain what the government loses, the game is not zero-sum because of the
second term in the two payoffs. If, however, the spectacular fails, the government just loses its
proactive expense, while the terrorists lose L but may gain recruitment benefits of c fs with
c fs 0 and css > c fs , since success generates more recruits than failure. In the 5 September 1972
Munich Olympics attack, the Black September terrorists failed when the West German police
(1)
5
opened fire in a rescue attempt at Frstenfeldbruck airbase prior to the terrorists boarding a
Lufthansa Boeing 727 to take them and the hostages to Cairo. Despite Black Septembers failure
to achieve any of its demands or to escape the scene, the Munich incident resulted in thousands
of Palestinians rushing to join the terrorist organization in the weeks that followed (Hoffman
1998, 71).
We now turn to the two sets of payoffs at the bottom right of the game tree,
corresponding to a normal events success and failure. For success, the government loses N and
its proactive costs, where S > N because a normal event has a smaller associated loss than a
spectacular event. The terrorists gain N plus a recruitment benefit of csn . The marginal
recruitment gain associated with a successful normal incident is less than that associated with a
successful spectacular i.e., csn < css . Obviously, our parameters are chosen to keep the analysis
simple while capturing the essential aspects of the underlying situation. The model is
sufficiently general to allow for csn ! c fs , so that recruitment for failed spectaculars may exceed
or fall short of successful normal events. Finally, the payoffs for a failed normal event is P ( )
and 0 for the government and terrorists, respectively. The 0 merely indicates that we have
normalized this payoff for simplification so the other payoffs to the terrorists are above this
value.
BASELINE MODEL: NO RECRUITMENT
To highlight the influence of recruitment on the analysis, we first present the case where
there is no recruitment, which comes the closest to the literature, except that we consider the
terrorists choice between spectaculars and normal events.3 Thus, we assume that
css = csn = c fs = 0 in Figure 1. To solve for the subgame perfect equilibrium to the game, we
6
apply backward induction by first solving for the terrorists choice of events and then
conditioning the governments choice on that of the terrorists. This procedure identifies the
subgame perfect equilibrium to this two-player game. The terrorists choose between a
spectacular and a normal event according to:
EU T ( s; ) ! EU T ( n; ) ,
(2)
where EU T is the terrorists expected utility, which equals

1
1
( S + L) L ! N.
r
(3)
This last inequality follows from the no-recruitment payoffs and the relevant success
probabilities. The terrorists engage in a spectacular if and only if
! =
S + L rN
,
rL
(4)
!
and execute a normal event otherwise, where denotes the critical level of proactive response
that induces a spectacular. Since 1 , a necessary condition for the terrorists to choose a
spectacular in the subgame perfect equilibrium is that S N > r , which follows from equation
(4).4
!
!
If the gain, S, from a spectacular rises, then S = 1 rL > 0; thus, is more apt to
exceed , thereby making spectaculars more likely. When either the terrorists losses from a
!
failed spectacular rises or the relative likelihood of a spectaculars success falls (as r rises),
falls in value and a spectacular is less likely.5 These comparative static results agree with
intuition.
To complete the search for a subgame perfect equilibrium, we now turn to the
governments choice of proactive measures, conditioned on the terrorists choice of events. The
government chooses to
max
{
{
}
( ) P ( ) } ,
max ! s ( ) S P ( ) + 1 s ( ) P ( )
max >!
( ) N P ( ) + 1 n
(5)
which can be rewritten as

max
max ! p ( S r )
(6)
max >! p ( N ) .
The Kuhn-Tucker conditions6 associated with the top problem in equation (6) results in a
subgame perfect equilibrium, in which the terrorists choose a spectacular and the government
chooses a proactive response where
s =
S
! S + L rN .
=
rp
rL
(7)
The bottom portion of equation (6) involves a subgame perfect equilibrium where the terrorists
choose a normal event and the government chooses a proactive level,7
n =
N ! S + L rN
.
> =
p
rL
(8)
If, therefore, the government wants to limit spectaculars, then it must choose a sufficiently large
proactive response since s > n , which follows from S N > r.
This is readily displayed in Figure 2 where payoffs are measured on the y-axis and the
proactive level on the x-axis. The EU T ( n; ) curve is a rectangular hyperbola with asymptotes
at the two axes. When = 1 , this expected value equals N [see the right-hand side of equation
(3)]. Similarly, the EU T ( s; ) curve is a rectangular hyperbola but with a horizontal asymptote
!
at L. The critical value of corresponds to the intersection of the terrorists expected utility
curves. In Figure 2, the subgame perfect equilibrium where the government chooses a proactive
level of
N p and the terrorists engage in a normal event is displayed by the vertical line,
8
where EU T ( n; ) exceeds EU T ( s; ) . If, however, the governments proactive level of
= S rp exceeds 1 but is less than or equal to !, then EU T ( s; ) exceeds or equals

EU T ( n; ) and proactive operations are insufficient to prevent spectaculars. Without
recruitment, we find that sufficient governmental offense eliminates spectaculars by weakening
the terrorists so they must engage in more modest operations. In the absence of empowerment
and recruitment, there cannot be too much of a good thing because proactive campaigns do not
incite greater terrorism. If the government just wants to eliminate spectaculars, then it equates
!
to to save on proactive costs. The reason that this is not necessarily the subgame perfect
equilibrium is that the government also limits its expected losses through its proactive response;
!
hence, its optimal choice of may lie well to the right of as proactive costs are traded off
against reduced losses from fewer attacks. The likelihood of spectaculars are low when lies
!
near to .
PROACTIVE CHOICES WITH RECRUITMENT
Now we return to the game tree and allow the terrorists payoffs at three of the outcomes
to include marginal recruitment benefits ( css > 0, c fs > 0, and csn > 0 ) from a spectacular
success, a spectacular failure, and a normal success. A spectacular success leads to the greatest
recruitment, while the productivity for recruitment in the other two cases depends on the relative
values of c fs and csn . For all three cases, the heavy-handedness of the government, as measured
by the size of , induces recruitment so proactive measures now have a downside.
Once again, we use backward induction to find the subgame perfect equilibrium for this
game. Terrorists now choose a spectacular when
9
1
1
( S + L + css c fs ) L + c fs ( N + csn ) ,
r
(9)
because EU T ( s; ) EU T ( n; ) , and engage in a normal event otherwise. Equation (9) can be

rewritten as:
rc fs 2 + ( css c fs rL ) + ( S + L ) r ( N + csn ) ,
(10)
which gives two critical values and where equation (10) is satisfied as an equality. In
Figure 3, the parabola with a y-intercept at S + L and a minimum at ( c fs + rL css ) 2rc fs
corresponds to the left-hand relationship in equation (10), while the solid straight upward-sloping
line with y-intercept at rN corresponds to the right-hand relationship in equation (10). The lower
( )
and upper ( ) bounds of distinguish the type of event chosen by the terrorists. For
modest proactive levels of ( , ) , the terrorists choose a normal event, while for or
, the terrorists engage in spectaculars. To the left of , the terrorists execute spectaculars
because proactive operations are too small to weaken them. Proactive measures are, however,
sufficiently large to the right of to recruit members and give the terrorists enough resources to
accomplish spectaculars.
In light of the anticipated choices of the terrorists, the target government must choose a
proactive response to
max
{
) {
}
( ) P ( ) } .
max , s ( ) S P ( ) + 1 s ( ) P ( )
max ( ,
( ) N P ( ) + 1 n
(11)
Recruitment has not altered the government objective from that of equation (6), but it has altered
the regions that determine the type of event. The subgame perfect equilibria to the game with
recruitment can be completely specified for all values of the exogenous parameters as follows:
10
( )
( )
If n , , then = n and the terrorists choose a normal event; if n , and s or
( )
s , then = s and the terrorists choose a spectacular; and if s , and n < , then
= and the terrorists are indifferent between a normal and a spectacular.
One subgame perfect equilibrium has the government choosing = N p between
and and the terrorists responding with a normal event. When the marginal costs, p, of
proactive measures are low, a rational government may choose a proactive level above ,
hoping to make the likelihood of a successful spectacular small. Unfortunately, rational
terrorists would choose a spectacular event owing to anticipated recruitment benefits. For
= S rp between 1 and , the terrorists again engage in spectaculars, because they have a
relatively high success probability. The government must anticipate the terrorists derived
payoffs especially from recruitment in order not to respond to such a degree that the terrorists are
pushed to execute spectaculars with potentially disastrous outcomes. In terms of a proactive
campaign, there can be too much of a good thing when it creates grievances and swells terrorists
ranks. There can also be too little proactive measures when recruitment is not significant so that
the pure publicness of such actions is the main consideration. Hence, governments must choose
an offensive that is neither excessive nor insufficient if spectaculars are to be avoided.
SOME COMPARATIVE STATICS
Suppose that the relative difficulty of spectaculars increases so n exceeds s by a larger

amount. This is captured by an increase in r, which has two effects in Figure 3. First, it shifts up
the straight line by increasing its intercepts while making it steeper see dashed line
!
!
r ( N + csn ) where r > r . By itself, this change widens the range of normal events as seen in the
11
diagram by the range where the dashed line lies above the parabola. Second, the change in r
influences the parabola as follows:
rc fs 2 + ( css c fs rL ) + ( S + L )
= c fs 2 L .
(12)
If the net payoff to the terrorists from a failed spectacular is negative (i.e., L > c fs ), then the
parabola shifts down (not shown) and this reinforces the increase in the range of normal events
as r increases. When, instead, recruitment benefits are sufficiently large with failure, the
parabola shifts up (not shown) and the net effect on the range of normal events depends on
whether the shift up of the straight line exceeds that of the parabola. We again see that
recruitment influences can go against conventional wisdom, because enhanced riskiness of
spectaculars may not necessarily curtail spectaculars. The 1972 Munich Olympics attack
sparked other attempted spectaculars, despite the improvement in commando forces e.g., the
German Grenzschutzgruppe Neun (GSG-9) that raised r.8
Next consider an increase in c fs or the marginal recruitment effect during a failed
spectacular. Taking a partial derivative of the parabola with respect to c fs gives r 2 > 0,
since r > 1 . Thus, an increase in this recruitment benefit reduces the range of normal events,
thereby augmenting the range of spectaculars. If c fs is sufficiently raised, the parabola then lies
everywhere above the straight line and only spectaculars result. In a real sense, martyrdom is a
means of raising c fs by promoting a belief that even death in attacks (successful or otherwise)
has sufficient reward for the cause by attracting other zealots to engage in large-scale events with
deadly consequences. Pape (2003) indicates that suicide missions kill on average 13 people,
while a nonsuicide mission kill on average less than 1 person.
An increase in the marginal recruitment effect, css , of successful spectaculars shifts up
12
the parabola by and, in so doing, decreases the range of normal events. In contrast, an
enhanced marginal recruitment effect, csn , of successful normal events steepens the r ( N + csn )
straight line without altering its vertical intercept. The comparative static change equals r > 0,
so that the range of normal events widens. Obviously, these two marginal recruitment influences
have opposing predictions on the range of normal events. If both css and csn increase by the
same amount, the latter influence dominates since r > so that normal events become more
prevalent. This outcome arises from the lower success probability associated with spectaculars.
An increase in S the payoff from spectaculars in the absence of recruitment gains
raises the vertical intercept of the parabola and augments the range of spectaculars. This agrees
with the earlier result regarding S when there is no recruitment; thus, the spectacular region
expands with gains to a spectaculars success, regardless of recruitment.
The final comparative static change concerns an increase in L or the terrorists loss from
failed spectaculars. Taking a partial derivative of the parabola with respect to L, we get:
rc fs 2 + ( css c fs rL ) + ( S + L )
= r + 1 < 0,
(13)
since r > 1. In Figure 3, an increase in L augments the vertical intercept of the parabola, but
shifts the parabola down and to the right so the normal range expands.
FURTHER IMPLICATIONS
Target countries have different abilities to counter terrorism, which affect their marginal
proactive costs (p). To put things in perspective, we assume that one country say, the United
States (US) has a lower p than another target say, the EU but are identical in terms of other
parameters. This cost difference may stem from the US having better technology or intelligence
13
to counter terrorism. Ceteris paribus, a low p encourages a larger proactive response. This
scenario is depicted in Figure 4 for the parabola and straight line whose intersection delineates
normal events for ( , ) from spectaculars outside these bounds. In Figure 4, the small p for
the US encourages sufficient proactive measures to trigger a spectacular owing to terroristperceived recruitment gains. In contrast, the EUs high p limits its proactive operations and
results in a normal event.
If the United States places a high value on terrorism-related losses (S) from a spectacular,
or the terrorists value comparable US losses over those from other countries, then this also raises
the level of US proactive measures by raising S, thus increasing the likelihood of spectaculars
against US interests. Targets such as the World Trade Center (WTC) had a high S value owing
to the potential loss of life, its symbol of US dominance in globalization, and its potential
financial consequences. Given the failed attempt in 1993 to bring down the north tower of the
WTC, the S value was particularly high.
In fact, the scenario depicted in Figure 4 appears to capture US and EU reactions
following 9/11. Because US losses from 9/11 far exceeded those of any other country, the Bush
administration and the American public clearly put very high values on future losses
understandably, S increased in relation to that of countries less harmed by 9/11. This
characterization of US perceptions is consistent with survey findings reported by Davis and
Silver (2004) in which Americans felt sufficiently threatened after 9/11 to sacrifice some civil
liberties for greater security. US superiority in military power and intelligence compared with
other target countries also made for a relatively low p. Past and current US efforts to secure its
borders and guard against terrorist attacks lowered p relative to other countries, which increased
US proactive response and promoted further spectaculars e.g., the attempted shoe bombing by
14
Richard Reid of American Airlines flight 63 on 22 December 2001, en route to Miami from
Paris.9 A sizable portion of proactive spending gets included in a countrys military budget.
Unlike most European countries, the US defense budget grew greatly following 9/11. A recent
study of the composition of terrorist events indicates that the proportion of deadly bombings has
increased greatly since 9/11 and the subsequent US-led war on terror (Enders and Sandler 2004).
This suggests that a greater reliance on proactive operations may be encouraging deadlier
attacks.
There is an interesting transnational externality associated with our analysis. Insofar as
terrorists stage their attacks where targets are softer, US proactive measures are apt to result in
spectaculars against US interests being staged abroad where defensive measures are inferior to
post-9/11 measures in the United States. Thus, the US war on terror has implications for
countries not part of this effort, because greatly elevated US proactive measures can deflect
spectaculars to these countries. Examples include the simultaneous bombings of two Bali
nightclubs killing foreigners including Americans on 12 October 2002, and the simultaneous
truck bombings of a residential complex in Riyadh, Saudi Arabia, housing foreigners including
Americans on 12 May 2003. Typically, proactive measures are viewed as being undersupplied
owing to their purely public good representation (see, e.g., Sandler and Siqueira 2003), where
only external benefits are derived by other countries. The analysis here indicates that such
actions can also create external costs as spectaculars are encouraged and shifted abroad. If
proactive policy implies both external benefits and external costs, then its supply can be too
little, excessive, or just right. When external benefits dominate, a proactive response is
undersupplied; when, however, external costs dominate, a proactive response is oversupplied. In
the unlikely event that external benefits exactly match external costs, proactive policy is optimal
despite the provider acting independently.
15
There is one consideration that may curtail excessive proactive measures by a nation with
a low p and high S. Even though the attacks may be shifted abroad, the terrorists still target
some of the offensive countrys assets. If the latter incorporates these costs on its interest abroad
in its calculus, then it will curtail its proactive response somewhat. Any internalization of these
external costs will, however, be incomplete, because the host countrys losses are unlikely to
influence the proactive countrys decision. For example, on 20 November 2003, two massive
suicide truck bombs exploded at the British Consulate and the British HSBC bank headquarters
in Istanbul, Turkey. Although the bombs were against British interest, all but three of the 30 or
so dead were Turkish Muslims.10 As attacks are transferred abroad, host countries sustain
collateral damage, ignored by the proactive country when deciding its counterterrorism policy.
CONCLUDING REMARKS
If proactive measures are cheap or if the perceived costs of future attacks are high, the
subgame perfect equilibrium may involve a targeted government engaging in relatively large
amounts of proactive operations that induce terrorists to resort to occasional spectaculars to tap
into recruitment benefits. Unquestionably, the experience of 9/11 raised S for the United States,
whose marginal proactive costs are relatively low compared with other countries. Since 9/11, the
relatively large US proactive campaign is consistent with the model presented and may be
excessive from a global standpoint as transference externalities imposed on other countries are
not taken into account when the United States decides its proactive options. As a consequence,
there may indeed be too much proactive operations with unintended fall-out.
Although this paper has focused on a two-player game between the terrorists and a
targeted state, an n-player game underlies proactive decisions where players consist of the n 1
possible target nations and the terrorist network. In choosing their proactive measures, the
16
targeted states fail to adjust for the externalities that they impose on one another, which then
allows the terrorists to exploit vulnerabilities from states uncoordinated actions. If resources are
to be allocated efficiently to counterterrorism, nations must act in unison. The international
community is far from accepting this basic insight.
17
Footnotes
1.
This percentage is computed from Sandler (2003, Table 1), whose data comes from the
2.
Spending on terrorist-related intelligence is not available.
3.
This analysis differs from Sandler and Arce (2003), which only allowed for a discrete
choice of preemption but permitted a three-player interaction involving two targeted

governments and a terrorist group.
By equation (4), we have
4.
because
5.
S + L rN
S+L
1 or r
, from which S N > r follows
rL
N +L
S
S+L
>
when S > N and L > 0 as assumed.
N N +L
These comparative static results depend on:

!
!
L ( S + L )
rN S
=
< 0.
=
< 0 and
2
2
rL
r
L
( rL )
The first inequality follows from S N > r.

6.
The Lagrangian is p
r
!
+ ,
where is a nonnegative Lagrangian multiplier. The first-order Kuhn-Tucker conditions

satisfy:
p + ( S r 2 ) = 0 and > 0,
and
(! ) 0 and 0.
7.
!
The Lagrangian is p + and the relevant Kuhn-Tucker conditions

18
give equation (8) since = 0 and > 0.
8.
The GSG-9 pulled off a daring rescue mission of hijacked Lufthansa flight 181, while
it was on the ground in Mogadishu, Somalia, on 18 October 1977. The rescue mission freed the
hostages with just minor injures to four hostages (Mickolus 1980, 734-40). Stun grenades were
used to gain a jump on the terrorists. Clearly, r had risen after Munich.
9.
In Figure 4, a reduced p shifts = S rp to the right.
10. The blast at the Consulate killed the UK Consul General Roger Short, 58.
19
REFERENCES
Arce M., Daniel G., and Todd Sandler. 2004. Counterterrorism: A game-theoretic approach.
Unpublished manuscript, School of International Relations, University of Southern
California.
Azam, Jean-Paul. Forthcoming. Suicide bombing as intergenerational investment. Public
Choice.
Bueno de Mesquita, Ethan. 2004. Conciliation, commitment, and counter-terrorism: A formal
model. International Organization 58( ), forthcoming.
Blomberg, S. Brock, Gregory D. Hess, and Akila Weerapana. 2004. Economic conditions and
terrorism. European Journal of Political Economy 20 (2):463-78.
Davis, Darren W., and Brian D. Silver. 2004. Civil liberties vs. security: Public opinion in the
context of the terrorist attacks on America. American Journal of Political Science 48
(1):38-46.
Enders, Walter, and Todd Sandler. 1993. Effectiveness of anti-terrorism policies: Vectorautoregression-intervention analysis. American Political Science Review 87 (4):829-44.
______. 1995. Terrorism: Theory and applications. In Handbook of defense economics,
Vol 1, edited by Keith Hartley and Todd Sandler, 213-49. Amsterdam: North-Holland.
______. 2004. After 9/11: Is it all different now? Unpublished manuscript, School of
International Relations, University of Southern California, Los Angeles, CA.
Heal, Geoffrey, and Howard Kunreuther. 2004. IDS models of airline security. Unpublished
manuscript, Graduate School of Business, Columbia University, New York, NY.
Hoffman, Bruce. 1998. Inside terrorism. New York: Columbia University Press.
Li, Quan, and Drew Schaub. 2004. Economic globalization and transnational terrorism.
Journal of Conflict Resolution 48 (2):230-58.
20
Mickolus, Edward F. 1980. Transnational terrorism: A chronology of events, 1968-1979.
Westport, CT: Greenwood Press.
Pape, Robert A. 2003. The strategic logic of suicide terrorism. American Political Science
Review 97 (3):343-61.
Sandler, Todd. 2003. Collective action and transnational terrorism. World Economy 26 (6):779802.
Sandler, Todd, and Daniel G. Arce M. 2003. Terrorism and game theory. Simulations &
Gaming 34 (3):319-37.
Sandler, Todd, and Walter Enders. 2004. An economic perspective on transnational terrorism.
European Journal of Political Economy 20 (2):301-16.
Sandler, Todd, and Kevin Siqueira. 2003. Global terrorism: Deterrence versus preemption.
Unpublished manuscript, School of International Relations, University of Southern
California, Los Angeles, CA.
Sandler, Todd, John Tschirhart, and Jon Cauley. 1983. A theoretical analysis of transnational
terrorism. American Political Science Review 77 (1):36-54.
United States General Accounting Office. 2004. Combating terrorism: Evaluation of selected
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Wilkinson, Paul. 2001. Terrorism versus democracy: The liberal state response. London:
Frank Cass.
Target (E) chooses proactive level
Terrorists (T) choose attack

Normal n
Spectacular s
Success
ps(q)
Fail
1- ps(q)
( ) ( )
-S - P(q)
S + cssq
- P(q)
- L + cfsq
Outcome
Success
pn(q)
Fail
1- pn(q)
( ) ( )
-N - P(q)
N + csnq
Figure 1. Proactive response game tree
- P(q)
0
Payoffs
EUT(s;q)
N
r p
EU T (n;q)
1
S+L-rN
rL
-L
Figure 2. Payoffs in the no recruitment game
rc fs q 2 + (css - cfs - rL)q +(S+L)

Payoffs
~( N + c q )
r
sn
S+L
r(N+csnq)
~
rN
rN
cfs + rL - css
Spectacular
0
Spectacular
2rcfs
Normal Events
Figure 3. Terrorists choice of event with recruitment
Payoffs
S
rpUS
r
N
r pEU
S+L
rN
q
Figure 4. Different outcomes for targets
AFTER 9/11: IS IT ALL DIFFERENT NOW?

by
Walter Enders
wenders@cba.ua.edu
205-348-8972
205-348-0590 (fax)
and
Todd Sandler
tsandler@usc.edu
213-740-9695
213-742-0281 (fax)
Final Revision: September 2004
Keywords: after 9/11; terrorism; time series; intervention analysis; war on terror; forecasts; BaiPerron test.
Contact author: Todd Sandler
AUTHORS NOTE: Walter Enders is the Bidgood Chair of Economics and Finance at the
University of Alabama. Todd Sandler is the Robert R. and Katheryn A. Dockson Professor of
International Relations and Economics at the University of Southern California. Sandler
California. The replication data set is available at http://www.yale.edu/unsy/jcr/jcrdata.htm. We
have profited from comments of anonymous referees.

Abstract
Using time-series procedures, we investigate whether transnational terrorism changed following
9/11 and the subsequent US-led war on terror. Perhaps surprising, little has changed in the
time series of overall incidents and most of its component series. When 9/11 is prejudged as a
break date, we find that logistically complex hostage-taking events have fallen as a proportion of
all events, while logistically simple, but deadly, bombings have increased as a proportion of
deadly incidents. These results hold when we apply the Bai-Perron procedure where structural
breaks are data identified. This procedure locates earlier breaks in the mid-1970s and 1990s.
Reasonable out-of-sample forecasts are possible if structural breaks are incorporated fairly
rapidly into the model.

Thousands of dangerous killers, schooled in the methods of murder, often supported by
outlaw regimes, are now spread throughout the world like ticking time bombs, set to go
off without warning In a single instant, we realized that this will be a decisive
decade(Bush 2002).
President Bushs State of the Union remarks strongly suggest that everything changed
on 11 September 2001 (henceforth, 9/11) with the world now confronting a far-flung network of
terrorists, bent on heinous attacks. While there is no question that perceptions changed and
deep-seated fears arose that fateful day, there has been no data-based analysis on how
transnational terrorism (i.e., terrorism with international implications or genesis) differs, if at all,
since 9/11. The perception on the street and the reporting in the news media is that terrorism is
now different. But is transnational terrorism really different after 9/11 and, if so, how is it
different?
The four simultaneous hijackings on 9/11 represent watershed terrorist events in a
number of ways. First, the carnage associated with 9/11 was unprecedented: the number of
people killed was as great as all deaths from transnational terrorism for 1988-2000 (Sandler
2003). Prior to 9/11, no terrorist incident, domestic or transnational, resulted in more than 500
casualties (Quillen 2002a, 2002b; Hoffman 2002). Second, 9/11 demonstrated that terrorists did
not require a weapon of mass destruction (WMD) to cause mass casualties and over $90 billion
in losses. Third, 9/11 underscored the brutality that some fundamentalist terrorists will
undertake. Terrorist experts had warned prior to 9/11 that religious-based terrorists viewed
nonbelievers as legitimate targets and sought maximum carnage (Hoffman 1997). Fourth, 9/11
created a greater vigilance on the part of industrial countries that have greatly augmented their
expenditure on homeland security. Since 2002, the budget supporting the activities of the US
Department of Homeland Security (DHS) grew by over 60% to $36.2 billion for fiscal year 2004
2
(DHS 2003). An even greater expenditure goes to fighting the war on terror beginning with
the invasion of the Taliban and al-Qaida in Afghanistan on 7 October 2001. Other spending
involves augmenting intelligence capabilities and underwriting efforts to enhance international
cooperation, including the freezing of terrorist assets.
Using linear time-series methods on quarterly data of transnational terrorist incidents
from 1970 through the second quarter of 2003 (i.e., 2003:2), this paper shows how transnational
terrorism has changed following 9/11 and the subsequent war on terror. In particular, we apply
formal tests for structural breaks in a number of time series including incidents involving
casualties, hostages, and bombings as well as proportion series made from these basic series. We
first look for structural breaks at 9/11 and then apply the Bai and Perron (1998, 2003) procedure
to identify breaks at unknown dates based on the data. When compared, the alternative methods
provide consistent evaluations of the impact of 9/11 on the pattern of transnational terrorism.
We use the identified break to obtain one-step-ahead and multi-step-ahead forecasts.
The analysis demonstrates that the basic time series e.g., the all-incident series,
bombings, and incidents with casualties displayed no changes after 9/11. Incidents remained at
their low pre-9/11 levels. What changed was the composition of events with terrorists relying on
deadly bombings to a greater extent than ever before and engaging in a very low proportion of
complex hostage-taking missions.
BACKGROUND
Terrorism is the premeditated use or threat of use of violence by individuals or
subnational groups to obtain a political or social objective through intimidation of a large
audience beyond that of the immediate victims. Although definitions of terrorism have varied,
violence and political motives are always key ingredients.1 By making attacks appear to be
3
random, terrorists intimidate a larger audience and enhance its anxiety. The targeted society
must then expend large outlays to protect a wide range of vulnerabilities. Terrorists rely on
numerous modes of attack that include hostage taking, bombings, suicide attacks, assassinations,
armed attacks, and threats. Terrorism can be divided into two categories: domestic and
transnational. Domestic terrorism begins and ends in the host country: the perpetrators and
targets are homegrown. Moreover, domestic incidents have ramifications for only the host
country. When, however, a terrorist incident in one country involves victims, targets,
institutions, or citizens of another country, terrorism assumes a transnational character. The
hijackings on 9/11 are transnational terrorist events for a number of reasons: the incidents were
planned abroad; the terrorists came from outside of the United States; support came from abroad;
victims were from over 80 countries; and the incidents had economic and security implications
worldwide. The near-simultaneous bombings of the US embassies in Nairobi, Kenya, and Dar es
Salaam, Tanzania, on 7 August 1998 as well as the two suicide car bombings aimed at British
targets in Istanbul on 20 November 2003 are transnational terrorist incidents.
We are interested in examining transnational terrorism before and after 9/11, because this
form of terrorism poses the greatest threat to developed countries. Since the late 1980s, most
industrial countries have relatively little domestic terrorism (Hoffman 1998; Wilkinson 2001).
The al-Qaida network with its affiliate terrorist groups in some 60 nations engages in
transnational terrorism. Changes in visa procedures, airport security, target fortification, and
other counterterrorism measures indicate that transnational terrorism represents the greater
concern to the authorities. By augmenting international flows of all kinds, globalization has
given potential terrorists greater cover and ability to cause larger economic repercussions from
their attacks. Because 9/11 was a transnational event, the impact of 9/11, if any, is anticipated to
be on transnational terrorism.
4
Once economists turned their attention to analyzing terrorism, they have emphasized that
terrorists are rational actors who maximize some goal subject to resource constraints (Landes
1978; Sandler, Tschirhart, and Cauley 1983). These constraints are influenced by governments
counterterrorism policies that can change the expected price associated with different terrorists
actions. Terrorists have been shown to respond rapidly to changes in relative risks stemming
from government actions: terrorists switched intended targets away from recently fortified
venues to relatively softer targets (Enders and Sandler 1993; Sandler and Enders 2004). Thus,
efforts following 9/11 to curb hijackings and attacks on embassies through increased security and
better intelligence should induce terrorists to use other modes of attack so that hostage-taking
events (e.g., skyjackings, and barricade and hostage-taking missions) should decrease both in
number and as a proportion of total terrorist events following post-9/11 measures.
Another important factor in anticipating a potential change in the pattern of transnational
terrorism involves the changing motives of terrorists since the November 1979 takeover of the
US embassy in Tehran and the Soviet invasion of Afghanistan in the same time period (Hoffman
1998). From the late 1960s until the latter 1980s, transnational terrorism has been primarily
motivated by nationalism, separatism, Marxist ideology, and nihilism (Wilkinson 2001). These
terrorists were interested in maintaining a constituency and, hence, tried to limit casualties. By
the 1990s, a driving force of transnational terrorism was religious-based fundamentalist groups
that are less constrained by social norms and view violence against all nonbelievers including
women and children as a sacramental duty (White 2003). The affiliates of the al-Qaida network
abide by this desire to cause casualties. Since the start of 1980, religious-based groups grew
from 2 of 64 active terrorist groups to about half of 58 active groups in 1995 (Hoffman 1997, 3).
Enders and Sandler (2000) demonstrated that events with casualties rose from 1979:4 onwards as
fundamentalist-based terrorism grew.
5
Another crucial consideration in understanding the potential pattern of transnational
terrorism following 9/11 involves the US-led war on terror, which has targeted al-Qaida and its
allied groups. Recent reports estimated that about two-thirds of al-Qaida leaders have been
either killed or captured; such attrition would severely limit the amount of command and control
that al-Qaidas highest echelon can exercise over its far-flung cells (Gerges and Isham 2003).
These same reports indicated that al-Qaida has had 3,400 suspects arrested worldwide since 9/11
and has lost many operatives during the Afghanistan War in 2001. Additionally, significant
financial assets ($135 million since 9/11) of the network have been frozen (The Economist
2003), which also compromises al-Qaidas capabilities. These manpower, leadership, and
financial losses are anticipated to limit the networks ability to engage in logistically complex
modes of attacks such as hostage taking. As a consequence, the al-Qaida network will turn to
logistically simple, but deadly, bombings. Such bombings can also be more attractive than
assassinations, which can be logistically complex and yield just a single victim. Given events
following 9/11 and the preferences of many of todays terrorist groups for carnage, we anticipate
fewer hostage-taking events and assassinations and a greater reliance on deadly bombings. Such
expected changes in the composition of the overall series of transnational terrorism would be
more evident by analyzing the proportion of hostage-taking attacks or the proportion of deadly
attacks due to bombings.
Other structural breaks are anticipated prior to 9/11. The modern era of transnational
terrorism began in 1968 following the Arab-Israeli conflict and Israels subsequent occupation of
captured territory. In frustration, the Palestinians resorted to international terrorism to publicize
their cause to the global community and gain recognition by the Israelis (Hoffman 1998). The
level of transnational terrorism hit a new plateau in the early to mid-1970s as Palestinian
frustration achieved new heights and their terrorist methods were copied by non-Palestinian
6
groups. For example, left-wing nihilist groups sprung up throughout Western Europe (Alexander
and Pluchinsky 1992) and ethno-nationalist movements worldwide employed transnational
terrorism to further their cause.
Another potential structural break is anticipated in the early 1990s following the end of
the Cold War when many of the left-wing terrorist groups in Europe (e.g., in France, Germany,
Spain, Portugal, and the United Kingdom) either ended their operations or were brought to
justice (Alexander and Pluchinsky 1992; Chalk 1996). This terrorism decline was also due to a
reduced interest in Marxism following the collapse of so many communist regimes. At the same
time, there was less state sponsorship of leftist terrorists by East Europeans and Middle Eastern
countries (Chalk 1996; Clutterbuck 1994). These factors in combination should lead to structural
downturns in terrorism in the early 1990s following the Gulf War, which generated some
terrorist backlash. Although terrorism is expected to decrease in the early 1990s, this time frame
also marked the rising influence of fundamentalist terrorism, so that a greater degree of
casualties is expected to characterize the anticipated reduced level of terrorism.
DATA
Data on transnational terrorist incidents were drawn from International Terrorism:
Attributes of Terrorist Events (ITERATE), a data set that records the incident date, location, type
(e.g., bombing or hostage event), number of people killed, and number of people wounded.
ITERATE relies on the worlds news print and electronic media for its information with a large
reliance on the Foreign Broadcast Information Service (FBIS) Daily Reports, which surveyed a
couple hundred of the worlds newspapers and related sources. By splicing together earlier
ITERATE data sets, ITERATE 5s common file contains 40 or so key variables common to all
transnational terrorist incidents from 1968:1 to 2003:2 (Mickolus et al. 2004). Coding
7
consistency for ITERATE events data was achieved by applying identical criteria and
maintaining continuity among coders through the use of overlapping coders and monitors.
ITERATE excludes terrorist incidents associated with declared wars or major military
interventions and guerrilla attacks on military targets of an occupying force. Even though
ITERATE records events on a daily basis, we used quarterly, rather than monthly or weekly, data
to avoid periods with zero or near-zero observations which would violate the underlying
normality assumptions of the time-series techniques applied.
We extracted eight primary time series to do our structural analysis. The ALL series
includes quarterly totals of all types of transnational terrorist incidents; the most important
component of this quarterly series is BOMBINGS, accounting for over half of all annual terrorist
attacks on average. BOMBINGS combines seven types of events: explosive bombings, letter
bombings, incendiary bombings, missile attacks, car bombings, suicide car bombings, and mortar
and grenade attacks. The HOSTAGE series includes quarterly totals of kidnappings,
skyjackings, nonaerial hijackings, and barricade and hostage-taking missions, whereas
assassinations (denoted by ASSNS) consist of politically motivated murders. Two additional
primary series are: (i) a quarterly DEATH series recording the number of terrorist incidents
where one or more individuals (including terrorists) died; and (ii) a more-inclusive
CASUALTIES series recording the quarterly total number of incidents where one or more
individuals were injured or died. We further broke down the bombing series by identifying the
quarterly number of bombings with one or more deaths (i.e., BOMB_K) and the number of
bombings with one or more casualties (i.e., BOMB_CAS).
To analyze the composition of terrorist incidents, we constructed a number of proportion
series. By dividing the quarterly entries of the HOSTAGE series by the number of overall
terrorist incidents, we obtained the quarterly share of hostage events denoted by P_HOSTAGE.
8
Similar divisions for ASSNS and BOMBINGS gave P_ASSNS and P_BOMBINGS. We also
divided the quarterly totals of events with casualties or deaths by the quarterly totals of all events
to construct the proportion of terrorist events with casualties and the proportion with deaths
indicated by P_CASUALTIES and P_DEATHS. These two proportion series can show whether
a typical incident is more threatening during the 1990s when the overall incident totals are down.
If, for example, these incident proportions shift up in the 1990s, then victims in an incident are
more likely to be injured or killed. Finally, we divided the quarterly total of deadly bombings
and bombings with casualties by the quarterly total of deaths and casualties, respectively, to give
the proportion of deadly incidents due to bombings (i.e., P_DEATHS_B) and the proportion of
incidents with casualties due to bombings (i.e., P_CAS_B). These two constructed time series
indicate whether a greater share of injurious terrorist events is now due to bombings.
TESTING FOR STRUCTURAL BREAKS AT 9/11

To determine whether the various incident series behave differently after 9/11, we first
estimated each series as an autoregressive process. Consider the AR(p) model:2
p 1
yt = a0 + yt 1 + i +1yt 1i + t ,
(1)
i=0
where yt is the number of incidents of a particular type occurring in time period t. For each
series, the lag length was selected by estimating equation (1) beginning with p = 6. If the tstatistic for p was not statistically different from zero at the 5% significance level, we reduced
the p by one and repeated the entire procedure. Once the lag length was determined, we tested
for a unit root using a Dickey-Fuller test. If we reject the null hypothesis that = 0, it is then
possible to estimate the series and perform hypothesis tests using standard asymptotic
distribution theory. We performed the tests without including time as a regressor, because there
9
is no evidence of a deterministic trend in any of the incident series. The presence of a unit root
may signify the presence of a structural break; i.e., Dickey-Fuller tests can have low power to
reject the null of a unit root in the presence of a structural break (Perron 1989).
PRIMARY SERIES
The results of the estimations for the eight primary incident series are shown in the top
half of Table 1. For the ALL series, the lag length is such that p = 3 (so that we used two lagged
changed for the augmented Dickey-Fuller test) and the estimated value of is 0.31. Since the
t-statistic for the null hypothesis that = 0 is 3.20, we can reject the presence of a unit root at
the 2.5% significance level. The critical values at the 2.5%, 5%, and 10% significance levels are
3.17, 2.89, and 2.58, respectively. Diagnostic checks indicated that the model is adequate in
that the Ljung-Box Q-statistics using 4 and 8 lags of the residuals have prob-values of 0.95 and
0.77, respectively. An examination of the top half of the table shows that only the ASSNS
(denoting assassinations) and CASUALTIES series are candidates to have unit roots. For
CASUALTIES, we could reject the null hypothesis of a unit root at the 10%, but not 5%,
significance level. The prob-value for the ASSNS series is just over 10%.
In an attempt to resolve the ambiguity regarding the CAUSALTIES and ASSNS series,
we used Perrons (1989) test for a unit root in the presence of a structural break. Because 9/11 is
very close to the end of the data, it is not surprising that the prob-values for this test are nearly
identical to those of the Dickey-Fuller test. Insofar as the two tests can have low power in the
presence of a structural break near the end of the data set, we do not difference the
CAUSALTIES and ASSNS series. The results using the first differences of these two series are
virtually identical to those reported in Table 1.
To test for a structural break at 9/11, we modified equation (1) by estimating an equation
10
of the form:
p
yt = a0 + ai yt i + 1 DPt + 2 DLt + t ,
(2)
i =1
where DPt and DLt are dummy variables representing 9/11. In equation (2), DPt is a dummy
variable such that DPt = 1 if t = 2001:3 and DPt = 0 otherwise. This type of pulse variable is
appropriate if the 9/11 attacks induced a temporary change in the { yt } series. The magnitude of
1 indicates the initial effect of 9/11 on { yt } and the rate of decay is determined by the
characteristic roots of equation (2). To allow for the possibility that 9/11 had a permanent effect
on the level of { yt } , the second dummy variable in equation (2) is such that DLt = 0 for t <
2001:3 and DLt = 1 for t 2001:3. The impact effect of 9/11 on { yt } is given by 2 , while the
long-run effect is given by 2 /(1 ai)
For each type of incident series, the fourth column of Table 1 reports 1 , the fifth column
reports 2 , and the sixth column reports the prob-value of the F-test for the joint hypothesis that
1 = 2 = 0 . For the ALL series, neither dummy variable is significant at conventional levels
and the joint test does not allow us to reject the null hypothesis that both dummy variables have
zero coefficients. An examination of Table 1 reveals some striking similarities for all of the
series reported. None of the pulse dummy variables are significant at conventional levels for the
eight primary incident series. All of the t-statistics are below 0.6 in absolute value. In fact, only
the HOSTAGE series exhibits any effects as a result of 9/11. The t-statistic for the 2
coefficient of DL for the HOSTAGE series is 2.35, and the magnitude of the coefficient is
6.05. This reflects the fact that the number of HOSTAGE incidents fell from a pre-9/11 mean
of almost eleven incidents per quarter to slightly more than 3. However, even this finding is
11
problematic because a careful inspection of the HOSTAGE series (reported later as Figure 1)
shows that the sharp drop in hostage incidents actually occurred in 1999.
We performed a number of other break tests to determine if they identify 9/11 as a break.
For example, a Chow test for a structural break was conducted by comparing the residual sum of
squares for the pre-9/11 period to that for the entire period; but it did not reveal the presence of a
break for any of the eight primary series. The CUSUM test also showed no evidence of
structural change in any of the series occurring in the neighborhood of 2001:3.
PROPORTION TIME SERIES
We found somewhat different patterns when we looked at the seven proportion series.
The results are reported in the bottom half of Table 1. There are several key results:
1. At the 10% significance level, we reject the null hypothesis of a unit root for all series
except the P_DEATHS and the P_CASUALTIES series. As mentioned earlier, the unit-root test
has low power in the presence of a structural break, so the failure to reject the null hypothesis of
a unit root may be evidence in favor of a structural break. When we performed unit-root tests on
the P_DEATHS and P_CASUALTIES series using only the data through 2001:2, the associated
t-statistics for the null hypothesis that = 0 are 4.27 and 4.85, respectively, leading to a
rejection of a unit root.
2. The pulse dummy variable is statistically significant for the P_DEATHS and
P_CASUALTIES series. For these two series, the t-statistics for the null hypothesis that 1 = 0
are 6.31 and 4.81, respectively. On impact, the proportion of incidents with deaths rose by 54
percentage points and the proportion of incidents with casualties rose by 48 percentage points.
The level dummy variables are, however, not significant at conventional levels. Hence, the
jumps in the P_DEATHS and P_CASUALTIES are not permanent.
12
3. The level dummy variable is highly significant for the proportion of hostage incidents
(P_HOSTAGE) and the proportion of deadly incidents due to bombings (P_DEATHS_B). The
intercept for the P_HOSTAGE series decreased by 8 percentage points and that for
P_DEATHS_B rose by 25 percentage points. These changes are estimated to be permanent.
The P_HOSTAGE series falls precisely at 9/11. There is some evidence ( t = 1.74 ) that the
proportion of assassinations (P_ASSNS) decreased by 16 percentage points after 9/11.

Generally, we did not uncover evidence that there were changes in the primary terrorist
series following 9/11. We did, however, uncover evidence that the composition of the terrorist
time series changed. This apparent switch from logistically complex hostage events to less
complex bombings is consistent with our predictions based on post-9/11 pressures on the alQaida leadership and enhanced security given to airports, embassies, and high-profile targets.
The reliance on deadly bombings also agrees with our priors concerning the changing nature of
terrorism.
MULTIPLE STRUCTURAL BREAKS

One criticism of these results is that there might be more than one structural break; e.g.,
Enders and Sandler (2000) reported significant changes in terrorism associated with the increase
in religious fundamentalism. Ignoring the effects of early breaks might cloud the effects of 9/11;
hence, one research strategy is to reestimate equation (2) by including dummy variables for all
such breaks. This strategy is problematic because there is a danger of ex post fitting if break
points are selected as a result of an observed change in the variable of interest. Moreover, a
number of events may roughly coincide with the selected break points. In addition, the efficacy
of the estimates cannot rely on the usual asymptotic properties of an autoregression, because an
increase in sample size does nothing to increase the number of points lying between two break
13
points. Just as it is difficult to know what dummy variables to include, it can be difficult to know
what factors to exclude. If important events influencing terrorism are excluded from the
estimating equation, there is still a specification problem.
An alternative methodology is to use a purely data-driven procedure to select the break
dates. Bai and Perron (1998, 2003) developed a procedure that can estimate a model with an
unknown number of structural breaks that occur at unspecified dates. For our purposes, the key
feature of the Bai-Perron procedure is that the number of breaks and their timing are estimated
along with the autoregressive coefficients. Bai and Perron (1998, 2003) also showed how to
form confidence intervals for the break dates. This is particularly important because there is
evidence that key changes in some of the incident series actually began prior to 9/11; we want to
ascertain whether the changes are due to 9/11 or to forces already in progress.
The form of the Bai-Perron specification that we considered is:
p
yt = j + ai yt i + t ,
(3)
i =1
where j = 1, , m + 1 and m is the number of breaks. Equation (3) allows for m breaks that
manifest themselves by shifts in the intercept of the autoregressive process. Our notation is such
that there are m + 1 intercept terms denoted by j . The first break occurs at t1 so that the
duration of the first regime is from t = 1 until t = t1 and the duration of the second regime is from
t1 + 1 to t2 . Because the m-th break occurs at t = tm , the last regime begins at tm + 1 and lasts
until the end of the data set. In applied work, the maximum number of breaks needs to be
specified. We allowed for a maximum number of 5 breaks. The procedure also required that we
specified the minimum regime size (i.e., the minimum number of observations between breaks).
Because our data runs through the second quarter of 2003, we used a minimum break size of 6 to
permit a break occurring as late as the first quarter of 2002. In principal, we could allow all
14
coefficients (including the autoregressive coefficients) to change; but this would necessitate
estimating a separate AR(p) model for each regime. Since the data include only a small number
of post-9/11 observations, this procedure is not possible here. Instead, we adopted what Bai and
Perron call the partial change model; this specification allowed us to estimate only one new
coefficient (i.e., the intercept) for each regime.
For each series, Table 2 reports the number of breaks (m), the point estimate of each
break date, the lower and upper bounds of a 95% confidence interval around the break dates
(Lower and Upper, respectively), the sample mean in the first regime (Initial Mean), and the
short-run (SR) and long-run (LR) changes due to the break(s). The short-run effect of break j is
measured by j +1 j , whereas the long-run effect is measured by ( j +1 j )/( 1 ai ).
The results for the various incident series reinforce the results regarding 9/11, reported in
Section 3. For example, a single structural break, not at 9/11, is found for the ALL series. The
most likely estimate of this break is 1994:3; a 95% confidence interval for the break date spans
the period 1993:4 through 1996:4. This confidence interval is not symmetric around 1994:3,
because the break is unlikely to have occurred much earlier than this date. In the first regime
(i.e., until 1994:3), the initial mean number of incidents per quarter is 106.62. After this break,
we estimated a short-run decline of 46.46 incidents and a long-run decline of 62.63 incidents.
The crucial point is that a 95% confidence interval for the break date does not include 9/11. This
structural break is consistent with our priors about the influence of reduced state sponsorship and
the demise of many terrorist groups in the late 1980s and early 1990s. Given that bombings
constitute half of the ALL series, a similar structural break characterizes BOMBINGS at 1994:1
in Table 2.
The HOSTAGE series experiences a single break after 2000:3 (i.e., the new regime
begins in 2000:4). The 95% confidence interval does include 2001:3; hence, the decline in the
15
mean number of HOSTAGE incidents from 13.79 to about 3.85 (13.79 9.94 = 3.85) may be
attributable to 9/11. There is no evidence of a break in the ASSNS series. Although the time
series for casualties due to bombings and incidents with deaths, each displays two structural
breaks, none of the 95% confidence intervals of these breaks include 9/11. For BOMB_CAS, the
two breaks took place at 1992:3 and 1994:3 as incidents dropped in number but became more
lethal on average as fundamentalist-based terrorism grew in importance. For the DEATHS
series, the structural break at 1975:3 coincides with the growing importance of transnational
terrorism in the early to middle 1970s. In contrast, the structural break for the DEATHS series at
1996:2 came as the number of transnational terrorist events decreased greatly.
In the bottom portion of Table 2, the structural breaks for six proportion series are listed.
These proportion series display a larger number of structural breaks compared with the primary
series. Notably, three of the proportion series P_HOSTAGE, P_DEATHS_B, and P_DEATHS
have structural breaks whose confidence intervals include 9/11. In particular, we estimated
four breaks in the P_HOSTAGE series with break dates of 1994:1, 1996:2, 2000:1, and 2001:3.
The confidence interval for this last regime, spanning 2001:1 through 2002:1, is associated with
a short-run decline of 37.6 percentage points. Clearly, terrorists have reduced their reliance on
hostage events since 9/11.
The proportion of incidents with deaths (P_DEATHS) is estimated to have 5 breaks. The
point estimate of the fifth break is 2001:2, so that beginning in 2001:3 the short-run increase in
the proportion of death incidents is 17.8 percentage points. Because the confidence interval for
the fifth break is entirely contained within that for the fourth break, there may have been an
ongoing increase in the proportion of deadly incidents that included the incidents on 9/11.
Nevertheless, the estimates are consistent with the rise in P_DEATHS being primarily due to
more deadly bombs. As shown in the Table 2, there is a short-run jump in P_DEATHS_B of 20
16
percentage points that is estimated to occur at 2001:2. Moreover, we find no evidence of breaks
associated with 9/11 in the proportion series associated with assassination and casualty incidents.
Table 2 is also consistent with our priors about transnational terrorism becoming more of
a threat in the early to mid 1970s i.e., the 1975:3 structural break for DEATHS, P_ASSNS, and
P_DEATHS, and the 1974:1 structural break for P_DEATHS_B. Moreover, the structural
breaks for B_DEATHS_B and P_DEATHS during the early to mid 1990s are consistent with our
priors that the period following the Gulf War had deadlier events on average than earlier periods.
Clearly, transnational terrorism changed in character at three times: in the mid-1970s; in the
1990s; and in and around 9/11.
FORECASTING BEYOND 9/11

We now use the previously identified structural breaks to forecast the various incident
series. Based on equation (3), the k-step ahead forecast of yt + k follows from:
p
Et yt + k = Et j + ai Et yt + k i ,
(4)
i =1
where Et yt + k is the expectation of yt + k conditional on the information set at t. Since a break

may occur between period t and period t + k, the appropriate value of j is unknown at t. We
assumed that a break date becomes known in the period containing the break. Although the
structural break at 9/11 could not be forecasted in period 2001:2, forecasts beginning in 2001:3
can use the fact that a break occurred. Of course, the magnitude of the break is unknown, so its
size must be estimated. As is standard practice, to obtain Et yt + k , we estimated equation (3) with
data through period t and then used the estimated coefficient to form equation (4). If a break in
the intercept occurs in period t + 1 to t + k, the forecasts will be poor, since they do not
17
incorporate the appropriate j .3
The break in the HOSTAGE series prior to 9/11 (indicated by a vertical line) is shown in
the top portion of Figure 1, where the HOSTAGE series fluctuates around the pre-break mean of
13.79 incidents per quarter until 2000:3. Thereafter there is a sharp drop in the series, so that the
new long-run mean is about 3.85. The lower portion of Figure 1 shows the 1-step-ahead
(unbroken line) and 8-step-ahead forecast errors, yt + k Et yt + k , for t = 1999:2 through 2003:2.
The two forecast errors are reasonably similar until 2000:4, and the series of 1-step-ahead errors
does not exhibit any unusual behavior at the breakpoint. Clearly, the 1-step-ahead forecasts
quickly capture the influence of a structural break so the forecast errors remain small; however,
the 8-step-ahead forecasts perform poorly beginning with the breakpoint. The forecasts
E1998:4 y2000:4 through E2000:3 y2002:3 are all quite negative. Because the long-term forecasts do not
include any information concerning the change in the intercept beginning in 2000:4, they all
perform poorly. These long-term forecasts reinforce the point that the HOSTAGE series began
to decline prior to 9/11. Moreover, the forecasts of the post-9/11 values that use the 2000:3
break date appear adequate.
The actual time series (1970:1 2003:2) and the forecast results for the DEATH series
are shown in Figure 2. Although the breaks are not as pronounced as those in Figure 1, the BaiPerron break date of 1996:2 seems quite reasonable. The lower forecast portion of the figure
reinforces the point that 1996:2 is a critical point in the data. The 8-step-ahead forecasts sharply
depart from the 1-step-ahead forecasts at 1996:2. In the top portion of Figure 2, there appears to
be a steady increase in the number of DEATH incidents following 9/11. However, the negative
finding concerning a break at 9/11 suggests that such an increase is not atypical. Moreover, the
1-step-ahead and 8-step-ahead forecasts are similar for the post-9/11 period, which is consistent
18
with 9/11 not being a structural break for the DEATH series.
The upper portion of Figure 3 shows the P_HOSTAGE series. The increases in the series
in 1994:1, 1996:2, and 2000:1 as well as the drop in 2001:3 are quite pronounced. The
appropriateness of the breakpoints is also shown in the lower portion of the figure, because the
long-term forecasts diverge from the 1-step-ahead forecasts at these break dates. For example,
the 8-step-ahead forecasts beginning from 2001:2 are all too high relative to the actual values of
P_HOSTAGE and to the 1-step-ahead forecasts. Thus, a little hindsight to recognize structural
breaks shortly after they occur can greatly assist the accuracy of forecasts.
CONCLUDING REMARKS
Over two years have passed since 9/11. In reaction to these attacks, targeted
governments have bolstered security at airports, embassies, and other high-profile targets. The
US-led offensive against al-Qaida and its network has taken a toll on al-Qaidas leadership and
finances. As a consequence, post-9/11 policies should have hampered al-Qaidas ability to direct
operations. We have applied time-series methods to uncover what, if anything, is now different
since 9/11. Surprisingly, little has changed to the series of all transnational terrorist incidents or
its major component of all bombing incidents. Moreover, the DEATHS and CASUALTIES
series have not changed following 9/11. The main influence of 9/11 has been on the composition
of the ALL series. In particular, hostage-taking incidents have fallen after 9/11 as terrorists, bent
on carnage, have substituted into deadly bombings. As a consequence, the proportion of deadly
incidents due to bombings has increased as the proportion of hostage-taking and assassination
attacks have decreased. Given official antiterrorist measures after 9/11, these changes are
understandable as terrorists substitute from hard to soft targets in the wake of security changes.
Additionally, stress on al-Qaida leadership may be responsible for a substitution from logistically
19
complex attacks (e.g., hostage taking and assassinations) to logistically simpler bombings. The
lack of a reversal to this composition effect in recent quarters suggests that a replacement to alQaida is not yet on the scene.4
When we do not prejudge structural breaks and apply the Bai-Perron method to identify
these jumps, a number of interesting results follow. First, the Bai-Perron findings regarding 9/11
are entirely consistent with our results when 9/11 is prejudged as a structural break. Second,
structural breaks characterize two earlier periods: (i) the early to mid 1970s when transnational
terrorism became more deadly; and (ii) the 1990s when there was a reduction in transnational
terrorism as state sponsorship fell. Third, the 1990s is also seen on average to have more deadly
events. The movement to greater casualties, underscored by 9/11, was foreshadowed by the
proportion series associated with deaths and casualties well before 9/11. Finally, we show that
reasonable forecasts are possible if structural breaks are incorporated fairly rapidly in the
underlying forecast model. Our results suggest that the war on terror has had effects some
good (e.g., the absence of an increase in incidents and fewer hostage incidents) and some bad
(e.g., a greater reliance on deadly bombings).
Because our work relies on univariate time-series methods, it can be extended in
interesting ways. A number of key series can be estimated as a vector autoregression (VAR).
Unlike a typical VAR, the intervention dummy variables DL and DP can be allowed to affect
each of the series simultaneously. In this way, the impulse responses of all of the series until
9/11 can be obtained jointly. Moreover, cross-equation restrictions can be used to obtain the
overall importance of 9/11. A second limitation of our univariate methodology is that it does not
permit us to attribute changes in the levels of the series to any precise set of economic or political
variables. The fact that many series appear to break in the early 1990s points to a decline in state
sponsorship and the demise of several left-wing groups. Without explicit incorporation of some
20
explanatory variables in our estimating equations, the causes of the breaks remain suggestive. A
worthwhile extension is to incorporate such variables. When more data points past 9/11 become
available, we can use a VAR approach, modeled after Enders and Sandler (1993), to investigate
the influence of counterterrorism actions imposed after 9/11 (Arce and Sandler 2005[this issue]).
21
Footnotes
1. Standard definitions of terrorism exclude state terror used by governments to control their
citizens through intimidation. Available data sets exclude state terror.
2. The incident series cannot go below zero and the proportion series cannot go below zero
or above unity. Most of the series do not have zero or near-zero values; the quarterly mean value
of almost all of the series are about two standard deviations from zero. Exceptions are the
ASSNS and BOMB_K series, each of which has a few zero values. Thus, the coefficient
estimates and standard errors are appropriate for all but two series. As a check, we reran Table 1
using the variables in logs for all but the ASSNS and BOMB_K series. We found no substantive
changes in the results for any series. Currently, the Bai-Perron methodology, used below, has
not been extended to include a negative binomial (or Poisson) structure to address any zero
problem for the ASSNS and BOMB_K series.
3. We remind the reader that the multi-step-ahead forecast errors are serially correlated.
4. We must remind the reader that our findings are based on data through 2003:2. Events
e.g., the insurgency in Iraq and the kidnapping of foreigners can change patterns in the future.
22
REFERENCES
Alexander, Yonah, and Dennis Pluchinsky. 1992. Europes red terrorists: The fighting
communist organizations. London: Frank Cass.
Arce M., Daniel G., and Todd Sandler. 2005. Counterterrorism: A game-theoretic analysis.
Journal of Conflict Resolution 49 (2): this issue.
Bai, Jushan, and Pierre Perron. 1998. Estimating and testing linear models with multiple
structural changes. Econometrica 66 (1):47-78.
_____. 2003. Computation and analysis of multiple structural change models. Journal of
Applied Econometrics 18 (1):1-22.
Bush, George W. 2002. State of the union. Website at
http://www.whitehouse.gov/news/releases/2002/01/20020129-11.html, accessed 2
January 2004.
Chalk, Peter. 1996. Western European terrorism and counter-terrorism. Houndsmills, UK:
Macmillan.
Clutterbuck, Richard. 1994. Terrorism in an unstable world. New York: Routledge.
Department of Homeland Security. 2003. Budget in Brief. Website at
http://www.dhs.gov/interweb/assetlibrary/FY_2004_Budget_IN_BRIEF.pdf, accessed 20
November 2003.
The Economist. 2003. Al-Qaeda operations are rather cheap. The Economist 369 (8344):45.
Enders, Walter, and Todd Sandler. 1993. The effectiveness of anti-terrorism policies:
Vector-autoregression-intervention analysis. American Political Science Review 87
(4):829-44.
_____. 2000. Is transnational terrorism becoming more threatening? A time-series
investigation. Journal of Conflict Resolution 44 (3):307-32.
23
Gerges, Fawaz A., and Christopher Isham. (2003). Sign of weakness? Do overseas terror
strikes suggest Al Qaeda inability to hit US? ABC News, November 22, 2003.
Hoffman, Bruce. 1997. The confluence of international and domestic trends in terrorism.
Terrorism and Political Violence 9 (1):1-15.
_____. 1998. Inside terrorism. New York: Columbia University Press.
_____. 2002. Rethinking terrorism and counterterrorism since 9/11. Studies in
Conflict & Terrorism 25 (5):303-16.
Landes, William M. 1978. An economic study of aircraft hijackings, 1961-1976. Journal
of Law and Economics 21 (1):1-31.
Mickolus, Edward F., Todd Sandler, Jean M. Murdock, and Peter Flemming. 2004.
International terrorism: Attributes of terrorist events, 1968-2003 (ITERATE 5). Dunn
Loring, VA: Vinyard Software.
Perron, Pierre. 1989. The great crash, the oil price shock, and the unit root hypothesis.
Econometrica 57 (6):1361-1401.
Quillen, Chris. 2002a. A historical analysis of mass casualty bombers. Studies in Conflict
& Terrorism. 25 (5):279-92.
_____. 2002b. Mass casualty bombings chronology. Studies in Conflict & Terrorism. 25 (5):
293-302.
Sandler, Todd. 2003. Collective action and transnational terrorism. World Economy 26 (6):
779-802.
Sandler, Todd, and Walter Enders. 2004. An economic perspective on transnational
terrorism. European Journal of Political Economy. 20 (2):301-16.
Sandler, Todd, John T. Tschirhart, and Jon Cauley. 1983. A theoretical analysis of
transnational terrorism. American Political Science Review 77 (1):36-54.
24
White, Jonathan R. 2003. Terrorism: 2002 update, 4th Ed. Belmont, CA:
Wadsworth/Thomson Learning.
Wilkinson, Paul. 2001. Terrorism versus democracy: The liberal state response. London:
Frank Cass.
Table 1: AR Estimation Using 9/11 as a Structural Break

Series
Lags
1
2
ALL
3
0.31
22.26
15.31
(3.20)
(0.54)
(0.89)
F
0.47
Q(4)
0.95
Q(8)
0.77
HOSTAGE
0.55
(5.38)
1.03
(0.16)
6.05
(2.35)
0.04
1.00
0.98
ASSNS
0.18
(2.56)
1.99
(0.44)
0.71
(0.41)
0.77
0.65
0.14
BOMBINGS
0.37
(3.64)
13.80
(0.48)
9.55
(0.84)
0.52
0.87
0.39
BOMB_K
0.54
(5.40)
0.75
(0.16)
0.51
(0.30)
0.95
0.71
0.33
BOMB_CAS
0.32
(3.09)
3.88
(0.50)
0.13
(0.05)
0.87
0.99
0.99
DEATHS
0.31
(3.97)
1.80
(0.28)
0.63
(0.26)
0.95
0.74
0.74
CASUALTIES
0.22
(2.84)
4.83
(0.48)
1.46
(0.37)
0.87
0.96
0.60
P_HOSTAGE
0.28
(2.77)
0.14
(1.37)
0.08
(2.36)
0.05
0.99
0.87
P_ASSNS
0.38
(3.74)
0.22
(0.93)
0.16
(1.74)
0.06
0.89
0.46
P_BOMBINGS
0.31
(3.26)
0.02
(0.12)
0.04
(0.96)
0.62
0.90
0.91
P_DEATHS_B
1.08
(8.48)
0.26
(1.25)
0.25
(3.32)
0.01
0.82
0.85
P_CAS_B
0.99
(8.30)
0.10
(0.57)
0.07
(1.21)
0.48
0.21
0.18
P_DEATHS
0.24
(2.47)
0.54
(6.31)
0.03
(0.72)
0.00
0.84
0.32
P_CASUALTIES
0.25
(2.36)
Note: t-statistics are in parentheses
0.48
(4.81)
0.04
(0.96)
0.00
1.00
0.96
Table 2: Estimates of Multiple Structural Breaks

Seriesa
Break Date
Lower
ALL
1994:3
1993:4
Upper Initial Mean

1996:4
106.62
HOSTAGE
2000:3
2000:1
2002:3
BOMBINGS
1994:1
1993:3
BOMB_CAS
1992:3
1994:3
DEATHS
SRb Effect
46.46
LRc Effect
62.63
13.79
6.69
9.94
1996:1
61.50
33.92
40.43
1989:4
1994:1
1993:3
1996:1
15.79
11.20
15.64
17.17
23.97
1975:3
1996:2
1973:2
1994:2
1976:2
1998:4
8.89
7.17
5.81
11.01
8.91
P_HOSTAGE
1994:1
1996:2
2000:1
2001:3
1991:3
1994:1
1998:4
2001:1
1994:4
1998:1
2000:4
2002:1
0.131
0.102
0.115
0.207
0.376
0.071
0.079
0.143
0.259
P_ASSNS
1975:3
1990:1
1974:1
1984:4
1975:4
1993:2
0.039
0.070
0.37
0.078
0.041
P_BOMBINGS
1977:4
1973:3
1980:1
0.679
0.097
0.180
P_DEATHS_B
1974:1
1993:2
1997:3
2001:2
1972:2
1992:1
1992:3
2000:4
1974:3
1993:3
2000:2
2001:4
0.039
0.050
0.112
0.064
0.200
0.036
0.079
0.045
0.142
P_DEATHS
1975:3
1994:1
1997:1
1999:4
2001:2
1974:3
1992:3
1995:2
1998:1
1999:1
1976:1
1994:2
1998:3
2002:2
2001:4
0.103
0.104
0.167
0.144
0.108
0.178
0.081
0.130
0.112
0.084
0.139
P_CASUALTIES
1999:4
1995:2
2001:1
a
Lag lengths are not necessarily those shown in Table 1.
b
SR denotes the short-run magnitude of the break.
c
LR denotes the long-run magnitude of the break.
0.292
0.123
0.279
Figure 1: HOSTAGE Incidents and Forecast Errors

HOSTAGE Incidents
35
30
25
20
15
10
5
0
Forecast Errors
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
1-Step and 8-Step Ahead Forecast Errors
25
20
15
10
5
0
-5
-10
-15
1992
1993
1994
1995
1996
1-Step Ahead
1997
1998
1999
8-Step Ahead
2000
2001
2002
2003
Figure 2: DEATH Incidents and Forecast Errors

DEATH Incidents
40
35
30
25
20
15
10
5
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
15
Forecast Errors
10
5
0
-5
-10
-15
-20
1992
1993
1994
1995
1996
1-Step Ahead
1997
1998
1999
8-Step Ahead
2000
2001
2002
2003
Figure 3: Proportion of Hostage Incidents and Forecast Errors

Proportion of Hostage Incidents
0.64
0.56
0.48
0.40
0.32
0.24
0.16
0.08
0.00
Forecast Errors
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2001
2002
2003
0.40
0.32
0.24
0.16
0.08
0.00
-0.08
-0.16
-0.24
-0.32
1992
1993
1994
1995
1996
1-Step Ahead
1997
1998
1999
8-Step Ahead
2000
Transnational Terrorism: An Economic Analysis
by
Todd Sandler
USA
tsandler@usc.edu
Walter Enders
Department of Economics, Finance,
and Legal Studies
USA
wenders@cba.ua.edu
August 2004
Abstract
Both theoretical and empirical techniques are used to put modern-day terrorism into perspective.
This paper surveys past contributions, presents updated empirical findings, and suggests new
directions for research. Because of strategic interactions among terrorists and targeted
government, game theory and economic methods play an important role in identifying novel
policy recommendations and behavioral insights. Transnational terrorism and efforts to curtail it
involves externalities and market failures. The paper analyzes how terrorists alter tactics in
reaction to government policies and how a no-negotiation hostage policy is difficult to institute.
JEL classifications: D74, H56
Acknowledgement: This paper is an extended, updated, and modified version of An Economic

Perspective on Transnational Terrorism, which appeared in the European Journal of Political
Economy, 20(2), 2004, pp. 301-316. Portions of this article are being republished with the kind
permission of Elsevier B.V. Todd Sandler is the Robert R. and Katheryn A. Dockson Professor
of International Relations and Economics at the University of Southern California. Walter
Enders is the Bidgood Chair of Economics and Finance at the University of Alabama. The
Center for International Studies (CIS) at the University of Southern California supported the
updating of the terrorism data for 2003.
I. Introduction
On 11 September 2001 (henceforth, 9/11), the world watched aghast as two commercial
airliners toppled the twin towers of the World Trade Center (WTC) and a third 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 and growing 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, and installing
technological barriers), negotiation responses in hostage incidents, the terrorists choice of target,
the economic impacts of terrorism, the provision of terrorism insurance, the curbing of
interdependent risk, and others.
Terrorism is the premeditated use, or threat of use, of extranormal violence by an
individual or a subnational group to obtain a political objective through intimidation or fear
directed at a large audience usually beyond the immediate victims. An essential aspect of this
definition concerns the presence of a political objective (e.g., getting the United States out of the
Persian Gulf states) that the terrorist acts or campaigns are designed to achieve. Incidents that
have no specific political demands are criminal rather than terrorist acts e.g., extortion for
profit. Another crucial ingredient is the use of extranormal violence or brutality to capture news
headlines. As the public becomes numb to their acts of violence, terrorists respond with more
heinous actions to recapture media attention. Thus, the escalation experienced on 9/11 was part
of an ongoing process. Terrorists often direct their violence and threats toward a vulnerable
target group, not immediately involved with the political decision-making process that they seek
to influence. The two planes that crashed into the WTC fit this pattern, but the other two planes
were targeted against decision makers. In a deliberate attempt to create a general atmosphere of
2
fear, terrorists strike at a variety of targets with alternative modes of operations (e.g.,
assassinations, bombings, and kidnappings), thus making it difficult for the authorities to
anticipate the venue of the next incident. Such actions make attacks appear to be random, so that
a targeted society must expend large amounts of resources to protect a wide range of
vulnerabilities. This simulated randomness provides terrorists with a cost advantage over the
stronger authorities who must defend against the threat that they pose. Because people tend to
overrespond to unlikely catastrophic events while ignoring more likely daily dangers (e.g., dying
in a car accident), terrorists succeed in achieving society-wide anxiety with minimal resources.
When a terrorist incident in one country involves victims, targets, institutions,
governments, or citizens of another country, terrorism assumes a transnational character. In the
WTC tragedy, citizens from over 80 countries lost their lives at the hands of foreign terrorists
who crossed into the United States from abroad. Obviously, the four hijackings on 9/11
constitute transnational terrorist attacks. During the 1980s, the kidnappings of foreigners in
Lebanon or the near-simultaneous suicide truck bombings at the US Marines barracks and
apartment building housing French Paratroopers, as a protest against Western policies, also
represent transnational terrorism. Transnational terrorist incidents are transboundary
externalities insofar as actions conducted by terrorists or authorities in one country may impose
uncompensated costs or benefits on people or property of another country. As such, myriad
market failures are associated with collective actions to curb international terrorism.
The application of economic methods to the study of terrorism began with Landes (1978),
who applied the economics of crime and punishment to the study of domestic skyjackings in the
United States. Economic methodology is particularly well-suited to provide insights in studying
terrorism. Economic analysis can account for the strategic interactions among opposing interests
e.g., among rival terrorists, the terrorists and the authorities, and among targeted countries.
3
Rational-choice models, based on microeconomic principles, can be applied to ascertain how
terrorists are apt to respond to policy-induced changes to their constraints. The same methods
can be used to analyze how governments react to terrorist-induced changes to their policymaking
environment. Altruistic-based intergenerational rewards can even be shown to motivate the
growing use of suicide bombings (Azam, forthcoming). Additionally, the theory of market
failures can underscore how agents independent optimization may be at odds with socially
efficient outcomes, so that governmental failures may result from well-intentioned policies. In
addition, various economic empirical methods can be applied to evaluate theoretical predictions
and policy recommendations. Empirical techniques can evaluate the economic consequences of
terrorism e.g., the impact of terrorism on tourism (Enders, Sandler, and Parise, 1992), foreign
direct investment, (Enders and Sandler, 1996), and per capita GDP (Abadie and Gardeazabal,
2003).
The primary purpose of this article is to survey some crucial insights gained from
applying an economic perspective to the study of terrorism. A second purpose is to present an
updated analysis of trends and cycles, policy-induced externalities, collective action responses,
and hostage negotiation strategy. A third purpose is to identify some future research directions.
II. A Look at the Data

To provide a perspective on the nature of the transnational terrorist threat, we compile
Table 1 based on data from the US Department of State (1988-2004). This table indicates the
annual number of transnational terrorist events, the associated deaths, the number of wounded,
and the number of attacks against US people and/or property for 1968-2003. During these 36
years, there were 14,857 transnational terrorist incidents in which 14,807 people (including those
on 9/11) died. On average, there were 411 fatalities per year which is relatively few, especially
4
compared with the 41,000 or so people killed annually on US highways. Each terrorist incident
kills on average about one person. The casualties on 9/11 represent a clear outlier with deaths on
this single day approximately equal to all transnational terrorist-related deaths recorded during
the entire 1988-2000 period.
An examination of Table 1 suggests that transnational terrorism follows a cyclical pattern
with much of the 1990s being relatively calm compared to the earlier two decades.
Transnational terrorism is particularly low during 2002-2003, with incidents on par in number to
that of 1969 at the start of the era of transnational terrorism. Something that cannot be seen from
Table 1 is that a high proportion of total casualties for a given year is typically associated with a
couple of spectacular events e.g., the simultaneous bombings of the US Embassies in
Nairobi, Kenya, and Dar es Salaam, Tanzania, accounted for 291 deaths and almost 5,000
injuries in 1998 (US Department of State, 1999). The right-hand column of Table 1 indicates
that approximately 40% of all transnational terrorist attacks are against US interests. This is
especially noteworthy from an externality viewpoint, because relatively few incidents take place
on US soil i.e., during 1998-2003, only six incidents (including the four skyjackings on 9/11)
occurred in the United States (US Department of State, 2004).
By having relatively secure borders, the United States must rely on foreign governments
to protect US citizens and property while abroad. Terrorists that target US interests e.g.,
Revolutionary Organization 17 November in Greece (known as 17 November) may operate
with impunity if the risks to foreigners are of little concern to the local government. This leads
to underdeterrence of terrorism from a multi-country viewpoint (Lee, 1998). Until the summer
of 2002 when a 17 November terrorist injured himself in an attempted bombing, the group had
engaged in over 140 attacks and 22 assassinations since 1973 with no arrests (Wilkinson, 2001,
p. 54). If, instead, much of the threat is to a host countrys interests, then overdeterrence may
5
result as the country does not account for the transference externality of causing the terrorists to
switch their attacks to another less-protected country. In the overdeterrence scenario, each
country engages in a Prisoners Dilemma arms race to deflect the common terrorist threat to an
alternative venue (Arce and Sandler, 2004; Sandler and Lapan, 1988; Sandler and Siqueira,
2003). Unless such actions decrease the overall level of attacks, each country expends resources
without securing their citizens safety, which is particularly relevant when these citizens are
targeted in other countries. This is a real concern for the United States, which has deflected
almost all attacks on its interests to foreign soil.
Data
Except for some annual totals, government-collected data sets have not been made
available to researchers. Mickolus (1982) developed a data set, International Terrorism:
Attributes of Terrorist Events (ITERATE) for 1968-77. This event-based data set was extended
to cover 1978-2003 by Mickolus et al. (2004). ITERATE uses a host of sources for its
information, including the Associated Press, United Press International, Reuters tickers, the
Foreign Broadcast Information Service (FBIS) Daily Reports, and major US newspapers (e.g.,
the Washington Post, New York Times).
testing theories. By relying on newspaper accounts, ITERATE is better at chronicling the
actions of terrorists (e.g., number of terrorists in a hit squad or terrorists actions during
negotiations) than in recording those of the authorities (e.g., how many commandos were used to
free a hostage). In select instances, government strategy is revealed by newspapers and is coded
by ITERATE. Because ITERATE is an events data set, researchers must rely on event counts
rather than on continuous measures of intensity unless casualty counts are used (Enders and
6
Sandler, 2000, 2002). ITERATE picks up newsworthy transnational terrorist incidents, so that
there is some bias, which must be recognized. The bias has worsened since mid-1996 when the
FBIS Daily Reports was no longer available to ITERATE coders.
Despite these difficulties, ITERATE is suited to a wide range of empirical tasks. For
example, it can display trends and cycles for events for forecasting purposes (e.g., Cauley and
Im, 1988; Enders, Parise, and Sandler, 1992). The data have even been used to investigate
terrorist and government bargaining behavior in hostage-taking events i.e., kidnapping,
skyjackings, and takeover of facilities (barricade and hostage-taking events) by Atkinson,
Sandler, and Tschirhart (1987). This latter study applied a time-to-failure model, where the
length of an incident is related to choice variables of the adversaries e.g., sequential release of
hostages, allowing deadlines to pass uneventfully, and the number of hostages secured.
Based on ITERATE data, we display two quarterly time series all transnational
incidents (All) and bombings in Figure 1 for 1968-2003. From Figure 1, we can see that
transnational terrorism displays peaks and troughs. Bombings are the favorite mode of operation
given year. Additionally, the bombing time series tracks the all-incident series rather well. The
latter half of the 1990s to the present represents a downturn in transnational terrorism due, in
large part, to fewer states sponsoring terrorism in the post-Cold War era (Enders and Sandler,
1999). In Figure 2, the quarterly time series for assassinations and hostage-taking events are
displayed for 1968-2003. Cycles are again apparent. The two time series display far fewer
incidents per quarter than bombings. If terrorists are rational actors, as we suppose, then they
should respond to risk and engage less frequently in those events that are more risky and
logistically complex, such as assassinations and hostage taking (Sandler, Tschirhart, and Cauley,
1983). Assassinations and hostage missions fell just prior to 9/11 and have not returned to their
7
old levels. There are probably three explanations for these drops. First, todays terrorists are
more interested in greater carnage than an assassinated individual. Second, extra precautions at
airports have reduced skyjackings one kind of hostage-taking mission. Third, the war on terror
has compromised al-Qaidas leadership and its ability to execute logistically complex and costly
attacks.
In Figure 3, we display the quarterly percentage of incidents with casualties (i.e., deaths
or injuries) for the 1968-2003 period. This time series is noteworthy because it indicates that
since the early 1990s, transnational terrorist incidents, although way down in number, are more
likely to end in injuries or death for victims. Terrorist experts have documented a change in the
makeup and motivation of the general perpetrators of terrorism since the takeover of the US
Embassy in Tehran in November 1979 (Hoffman, 1998). From the late 1960s until the latter
1980s, transnational terrorism has been primarily motivated by nationalism, separatism, Marxist
ideology, and nihilism (Wilkinson, 1986). In the 1990s, the motivation of terrorism changed
with the emergence of either obscure, idiosyncratic millennium movements or religious-based
fundamentalist groups (Hoffman, 1997, p. 2). Since the beginning of 1980, the number of
religious-based groups has increased as a proportion of the active terrorist groups: 2 of 64
groups in 1980, 11 of 48 groups in 1992, 16 of 49 groups in 1994, and 25 of 58 groups in 1995
(Hoffman, 1997, p. 3).
With the earlier prevalence of leftist-based organizations that wanted to win the hearts
and minds of the people, such terrorist groups avoided casualties except of individuals
characterizing the establishment or the enemy. Today, fundamentalist terrorist groups
purposely seek out mass casualties, viewing anyone not with them as a legitimate target as 9/11
showed. Enders and Sandler (2000) show that a significant rise in casualties from transnational
incidents can be traced back to the takeover of the US Embassy in Tehran. In recent years, an
8
incident is almost 17 percentage points more likely to result in death or injury compared with the
earlier eras of leftist terrorism.
To highlight the changing patterns of transnational terrorism since 9/11, we display the
proportion of bombing incidents and the proportion of hostage-taking events for 1968-2003 in
Figure 4. Since 9/11, transnational terrorisms have decreased the proportion of hostage events
and greatly increased the proportion of bombings. This pattern is consistent with todays
fundamentalist terrorists going for greater carnage and avoiding costly and risky hostage events.
Trends and cycles

Judging by the publics and medias reaction to 9/11, one might conclude that
international terrorism is on the rise, but the opposite is true as Figure 1 showed. This
misperception may be due to the increasing likelihood of an incident resulting in casualties,
making incidents on average more newsworthy. The standard procedure for ascertaining the
form of a deterministic trend is by fitting a polynomial in time (t), where additional trend terms
(i.e., t, t2, t3) are added until the associated coefficient is no longer statistically significant. For
1968-2003, we investigate trends for six time series extracted from ITERATE: hostage taking,
bombings (of all types), threats and hoaxes (i.e., threatened future incidents or a false claim for a
concurrent incident a bomb aboard a plane, when there is no bomb), assassinations, incidents
with casualties, and all transnational terrorist incidents. Table 2 indicates the polynomial trend
estimates for these six series (where time = t), all of which are characterized by a nonlinear trend.
The t-ratios associated with the coefficient estimates are indicated in parentheses beneath the
constant and the time trend terms. Five of the six series are represented by a quadratic trend with
a negative coefficient for the squared time term. This characterization reflects the fact that series
tended to rise in the late 1960s and to decline in the late 1990s. Only the threats and hoaxes
9
series is represented by a more complicated cubic trend; nevertheless, this series also displays a
similar inverted U-shaped pattern.
In Table 2, the next-to-the-last column on the right reports the F-statistics and their
prob values in brackets, representing the statistical significance of the overall regression.
These significance levels are all zero to three digits, which are strongly supportive of the fitted
nonlinear trend equations. Such fitted trends are not useful for very long-term forecasting,
because there is little reason to believe that the number of incidents will continue to decline.
Instead, the fit of the nonlinear trend cautions against simple statements about a decidedly
upward or downward trend to any form of international terrorism. Such proclamations are
common in the media. The trend analysis suggests that there is persistence in each of the
incident series high and low levels of terrorism come in waves or cycles. Shocks to any
incident series are not permanent, so that there is a reversion toward a long-run mean.
Cycles in terrorism data have been attributable to a number of factors. Alexander and
Pluchinsky (1992) explain fluctuations in terrorism using demonstration and copycat effects.
Heightened public sensitivity following a successful terrorist attack induces other terrorists to
strike when media reaction is likely to be great. The anthrax attacks following the events of 9/11
appear to correspond to this pattern. Economies of scale in planning terrorist incidents by
terrorist groups or networks may also lead to the bunching of attacks. Cycles may also stem
from the attack-counterattack process between the terrorists and authorities (Faria, 2003). Public
opinion following a spate of attacks can prompt governments periodic crackdowns that
temporarily create a lull in transnational terrorism. These downturns are subsequently followed
by countermeasures and recruitment by the terrorists as they prepare for a new offensive. Chalk
(1995) indicates that cycles based on public-opinion pressure swings are in the three to five year
range, insofar as time is required for the public to unite and successfully make their demands on
10
officials to do something a prediction borne out by time series investigations (Enders and
Sandler, 1999).
In our past work, we find that each type of terrorist series has its own characteristic cycle
that hinges on the logistical complexity of the attack mode. Enders and Sandler (1999) and
Enders, Parise, and Sandler (1992) argue that logistically complex events such as skyjackings,
large suicide car bombings, and assassinations will have longer cycles than less sophisticated
events as the attack-counterattack interaction among adversaries takes longer. Such complex
missions utilize relatively large amounts of resources as compared to small explosive bombings,
threats, and hoaxes. Given their resource constraints, terrorists can more easily gear up for a
campaign dominated by small bombs than one relying on more resource-intensive events.
The theory of Fourier series allows a wide class of functions to be expressed in terms of
sine and cosine components. To uncover the underlying cycles in a series, a researcher must
regress the detrended values of a series on all frequencies in the interval [1, T/2], where T is the
number of observations. The frequency of a series indicates how fast the underlying cycle is
completed a low (high) frequency implies a long (short) cycle. A graphical depiction the
proportionate variation explained by each frequency (called the periodogram) has large peaks
representing the crucial underlying frequencies. Some series with obvious cycles, like sunspots
or average daily temperatures, will display a periodogram with a single focal frequency. Given
the stochastic behavior of terrorists and the measures applied to curb terrorism, there is unlikely
to be one deterministic frequency that dominates the periodicity for any of the six series. Thus,
we use a different approach than trying to identify one particular frequency. Series with long
periods will have most of their variance explained by the low frequencies, whereas series with
short periods will have most of their variance explained by high frequencies.
In accordance with spectral analysis, we detrended each series using the fitted polynomial
11
trends in Table 2. The last two columns of Table 2 report the total variance of each series and
the proportion of this variance accounted for by the lowest 15 percent of the frequencies. In
particular, we report the proportion of the variance explained by the frequencies in the interval
[1, 0.15 T/2]. We anticipate that the logistically complex incidents types will have relatively
large amounts of this proportion attributable to the low frequencies. The all-events series has a
large variance of 1256.651 with just 22.2 percent corresponding to the relatively low frequencies.
In marked contrast and in accordance with our priors, the more complex events of assassinations
and those involving casualties have smaller variances with more of this variance (39.3 and 39.1
percent, respectively) attributed to low frequencies. As predicted, threats and hoaxes of
bombings display the greatest evidence of short cycles with approximately 25 percent of their
variance explained by the longest cycles. Hostage taking is in the intermediate range with 31.1
percent of the variance explained by the low frequencies. Some hostage-taking events (e.g.,
skyjackings) are complex, while others (e.g., kidnapping) are not so complex; hence this
intermediate finding for all hostage-taking missions is sensible.
III. Game Theory and Hostage Taking

Despite the events of 9/11, hostage taking may still involve negotiations, because most
such missions involve kidnappings, where the terrorists are not suicidal. Skyjackings in Turkey
and Cuba during March 2003 demonstrate that not all such events include terrorists bent on mass
destruction. Nevertheless, suicide skyjackings and the reactions of desperate passengers to fight
back must be analyzed in the future along with a governments decision to destroy a hijacked
plane.
To date, there have been seven economic analyses of hostage-taking events i.e.,
Atkinson, Sandler, and Tschirhart (1987), Lapan and Sandler (1988), Selten (1988), Islam and
12
Shahin (1989), Sandler and Scott (1987), Scott (1991), and Shahin and Islam (1992). The first
three studies stress game-theoretic aspects, while the latter four studies do not. We focus our
remarks around the Lapan and Sandler (1988) study, which is the most general of these three
game-theoretic studies. The question posed by their investigation is whether or not a stated
policy by which a government precommits never to negotiate with hostage takers will have the
intended consequence of keeping terrorists from ever taking hostages. The conventional wisdom
states that if terrorists know ahead of time that they have nothing to gain that they will never
abduct hostages. This belief has become one of the four pillars of US policy with respect to
addressing transnational terrorism i.e., make no concessions to terrorists and strike no deals
(US Department of State, 2001, p. iii).
The underlying game tree is displayed in Figure 5, where the government goes first and
chooses a level of deterrence, D, which then determines the likelihood, , of a logistical failure
(i.e., failure to secure hostages). Because deterrence expenditure (equivalent to D) must be paid
by the government in all states of the world, it is analogous to an insurance premium and is,
hence, part of the cost to the governments payoff, listed above that of the terrorists, at the four
endpoints to this simple game in Figure 5. More risk-averse governments choose higher
deterrence levels and experience less hostage taking at home. Once deterrence is decided, the
terrorists must then choose whether or not to attack. The probability of an attack, , depends on
whether the terrorists expected payoffs from a hostage-taking attack are positive. If
!
c < c* = [(1 ) ] [ pm + (1 p)m], then the terrorists are better off attacking even though they
!
receive c for a logistical failure and (1 )[ pm + (1 p )m] for a logistical success. We have c
< c* when the expected payoff from a logistical success, which accounts for negotiation success
or failure, exceeds the expected payoff from a logistical failure. In Figure 5, corresponds to
13
c*
0
f (c)dc, where f(c) is the probability density for c which reflects the unknown resolve of the
terrorists.
If hostages are apprehended (i.e., logistical success occurs), then the government must
decide whether or not to capitulate to terrorists demands, where p is the likelihood of
government capitulation. The probability of a hostage-taking incident increases with the
likelihood of a logistical success, the probability of a government capitulation (if hostages are
secured), and the benefit of a successful operation, m. In contrast, the likelihood of an attack
decreases with smaller terrorist payoffs associated with logistical and negotiating failures i.e.,
!
smaller |c| and m.
The conventional wisdom for the never-to-capitulate policy hinges on at least four
implicit assumptions: (i) the governments deterrence is sufficient to stop all attacks; (ii) the
governments pledge is fully credible to all would-be hostage takers; (iii) the terrorists gains
from hostage taking only derives from the fulfillment of their demands; and (iv) there is no
uncertainty concerning the payoffs. Each of these assumptions may not hold in practice.
Deterrence will not stop all attacks if the terrorists perceive that there is a positive expected
!
payoff from taking hostages that (1 ) pm + (1 p ) m c > 0 . Even if the governments
!
!
pledge is believed by the terrorists (i.e., p = 0), conditions on m exists [i.e., (1 ) m > c ], so
that the terrorists can derive a positive gain from securing hostages when getting no concessions.
This may arise when media exposure from holding the hostages is sufficient reward in itself. If,
however, the governments pledge is not completely credible (i.e., p > 0) owing to past
!
concessions, then the terrorists expected payoff is greater by (1 )( pm pm ) than in the case
of a credible governmental pledge, and so an attack becomes more imminent. When a terrorist
!
group is sufficiently fanatical that it views failure as having a positive payoff (i.e., m > c > 0 ),
14
then the expected payoff is always positive even when = 1 and deterrence is insufficient to
make failure a certainty.
At the endpoints of the game, the payoffs may themselves be uncertain. In this regard,
we focus on the payoffs to government from the four possible outcomes to the game. With no
attack, the government incurs only the cost of deterrence. If an attack ensues but fails (i.e., no
hostages are taken), then the government incurs the cost of a (> 0) in addition to deterrence
expense; if, however, an attack succeeds, then the government experiences an added cost of h for
capitulating and n for not capitulating. The game is more interesting (and realistic) by allowing
either h or n, or both to be uncertain. When, instead, h and n are known beforehand, the
governments response would be to not capitulate provided that h > n. In the latter case,
conventional wisdom applies. Next, suppose that n is a random variable, which may assume a
large value for some hostages (e.g., a soldier or member of parliament). The government is now
guided by comparing h with the expected value of n, and then choosing the smallest, which may
involve conceding to terrorist demands (e.g., the Israeli release of 1,150 Arab prisoners in a
negotiated swap for three Israeli soldiers in May 1985) when the expected value of n exceeds h.
For the scenario when both h and n are random, the choice then hinges on choosing the
negotiation response that minimizes the expected cost. A precommitment strategy to never
concede to hostage takers demands may be time inconsistent when a government later discovers
that the cost of holding firm is too high owing to cost randomness. Although the government has
every intention to fulfill its pledge, its inability to deter all incidents and the terrorists ability to
capture the right hostage means that a government may, at times, renege on its pledge.
The game representation can be made more realistic by allowing multiple periods and
reputation costs. A government concession in one period to hostage takers makes terrorists raise
their belief about future concessions. As p increases for future periods, more hostages will be
15
taken, so that there is an added cost to conceding in any period. This cost is denoted by R for
loss of reputation, and results in capitulation costs to the government, becoming h + R + D() in
Figure 5. Even when reputation cost is included, conceding may not be eliminated unless h + R
exceeds n for all its realizations. Such a scenario may be achieved through rules e.g., a
constitutional amendment that imposes sufficiently severe punishment to eliminate any
discretion of government negotiators.
The game can be made still more realistic by including additional sources of uncertainty
in terms of the terrorists payoffs. Hostage-taking incidents involve asymmetric information and
uncertainty on the part of both terrorists and governments (Lapan and Sandler, 1993; Overgaard,
1994). The beauty of game theory is that it permits the evaluation of policies while accounting
for uncertainty and strategic interactions of opposing interests. In so doing, easy fixes may not
be so straightforward.
IV. Game Theory and Governmental Responses
We have already discussed the transference externality when terrorists target two or more
countries and each independently chooses a level of deterrence that fails to account for associated
external costs/benefits. External costs are present when deterrence at home displaces the attack
abroad, while external benefits are relevant when deterrence at home either protects foreigners or
reduces the level of attacks globally. Depending on the opposing external effects, and there may
be others not listed, there may result too much or too little deterrence (Sandler and Arce, 2003;
Sandler and Lapan, 1988; Sandler and Siqueira, 2003). The overdeterrence/underdeterrence
problem is heightened when a terrorist network (e.g., al-Qaida) operates in upwards of 60
countries and stages their attacks worldwide (US Department of State, 2001). Underdeterrence
is particularly acute in countries sympathetic to a groups grievances when the group focuses
16
their attack on foreigners. As the number of potential targets increase, transference efforts may
be especially large. By forming a global network, terrorists limit the effectiveness of countries
efforts to thwart terrorism as externalities are maximized through countries uncoordinated
decisions. Terrorists will naturally seek out the weakest link i.e., the country with the least
security for the venue for their next attack. To address these weaknesses, prime targets, such
as the United States, have instituted programs to assist such weakest-link countries in bolstering
their counterterrorist capabilities. In fact, this assistance is another of the four pillars of US
antiterrorism policy (US Department of State, 2001). Ironically, US efforts to induce other
countries to secure their airports and public places make the United States a more attractive
target, as 9/11 sadly demonstrated.
If the terrorist networking advantage is to be countered, then targeted nations must learn
to coordinate their own efforts at counterterrorism. This poses a special problem because nations
resist sacrificing their autonomy over security matters to a supranational collective. With this in
mind, terrorist experts have often called for piecemeal policy where intelligence is shared but not
deterrence decisions (e.g., Kupperman, 1987, p. 577). Such piecemeal responses may be
inadvisable when the strategic incentives are taken into account. Suppose that a terrorist network
targets three countries, each of which are engaged in overdeterrence to transfer the attack abroad.
Further suppose that intelligence allows the targeted countries to better judge the marginal
effectiveness of diverting attacks by revealing the terrorists preference for alternative targets.
As these nations acquire this information, they become better adept at diverting attacks, thereby
augmenting the negative transference externality. The net impact of this information sharing
may be to heighten the transference race without providing more security, so that the added
deterrence cost simply makes the three countries worse off. This results in a second-best
outcome in which the change in one policy parameter (i.e., increased information sharing) which
17
would, under full cooperation, improve efficiency, may worsen inefficiency when a second
policy (i.e., coordination of deterrence) is not chosen optimally. A similar second-best scenario
may characterize other partial responses e.g., greater actions to apprehend terrorists without
coordinating efforts to increase punishments. The failure to coordinate retaliatory responses
until 7 October 2001 is another piecemeal response that may have led to inefficiencies. Thus, the
application of game theory again raises policy concerns previously ignored in the literature.
V. Fighting Terrorists and Their Sponsors
Although governments are often confronted by the same terrorists who will target the
countries assets and people at home and abroad, countries nevertheless find it difficult to form
coalitions to attack the terrorists on their sponsors directly. Actions to coordinate retaliation
against terrorist camps are typically characterized as a Prisoners Dilemma (e.g., Lee, 1988;
Sandler, 1997; Sandler and Arce, 2003) where the dominant strategy, giving the greatest reward
regardless of the other countries action, is to do nothing. This representation follows because a
countrys own cost of attacking exceed its perceived benefits. Terrorists locate in out-of-the-way
places that give them a strategic and cost advantage e.g., al-Qaida located in the caves and
mountains of Afghanistan. This locational advantage raises a retaliators costs, thus limiting a
nations desire to assume this role. Perceived retaliation cost may also be high relative to
derived benefits, because the retaliator often attracts subsequent terrorist attacks as a protest to its
action (Brophy-Baermann and Conybeare, 1994; Enders and Sandler, 1993). Any retaliatory
action, however, yields purely public benefits nonexcludable and nonrival to all potential
target countries. For example, suppose that three countries confront a common terrorist threat.
Further suppose that unilateral action by any nation costs it 6 but confers benefits of 4 on each of
the targeted nations. Thus, the retaliator nets 2, while the other nations receive a free-rider
18
benefit of 4. From a social viewpoint, each retaliator gives more total benefits to society than its
individual costs; however, from the nations perspective, costs exceed benefits and it will do
nothing.
Action may, however, occur if some nation is the prime target so that its actions provide
more benefits to it than to other countries. When these nation-specific benefits begin to
outweigh the associated costs, a prime-target nation acts and privileges other less-preferred
targets with a free ride (Arce and Sandler, 2004; Sandler, forthcoming). After 9/11, the two
countries the United States and the United Kingdom that lost the most were the main two
participants in the attack of the Taliban and al-Qaida in Afghanistan. These targeted countries
had to be seen by their people to be doing something to protect their lives and property against
another devastating attack. Without action, the ruling government would lose legitimacy. This
need to maintain legitimacy in the aftermath of 9/11 raised the benefits of retaliatory action
sufficiently to warrant acting alone if required. This was particularly true for the United States.
A number of lessons in building a coalition to weaken a terrorist threat can be gleaned
from the aftermath of 9/11. Asymmetric targets foster action. If some countries are the choice
targets, then they may be sufficiently motivated to act. In addition, the terrorists encourage this
coalition building by concentrating their attacks on relatively few nations and escalating the
magnitude of spectacular attacks. If they were to spread their attacks more evenly over nations,
no nation may derive sufficient benefits to privilege the rest of the group with a free ride from a
retaliatory action. Terrorists will concentrate their attacks to satisfy a constituency. Terrorists
desire to capture the attention of the media means that they must kill lots of people with some
attacks. As death tolls mount, nations become motivated to act as benefits start to outweigh
costs.
19
VI. Rational-Choice Representations of Terrorists
Beginning with the Landes (1978) study of skyjackings, economists characterize

terrorists as rational actors who maximize expected utility or net payoffs subject to constraints.
Arguments in these constraints may consist of terrorists resource endowments or actions taken
by the authorities to thwart terrorism. In the Landes (1978) model, potential hijackers engage in
a hijacking provided that the associated expected utility exceeds other nonskyjacking means of
furthering their goals. Based on this utility comparison, Landes (1978) specifies an offense (i.e.,
number of skyjackings) function, whose independent variables include the hijackers subjective
estimate of the likelihood of apprehension, their estimate of the conditional probability of
imprisonment (if apprehended), and other actions by the authorities (e.g., the presence of US sky
marshals on flights). Using data on US hijackings for 1961-1976, Landes demonstrates that
greater prison sentences and enhanced likelihood of apprehension are significant deterrents. He
also indicates that the installation of metal detectors on 5 January 1973 led to between 41 and 50
fewer hijackings in the United States during 1973-1976.
In a subsequent analysis, Enders and Sandler (1993) examine a wide range of policy
interventions, including metal detectors, fortification of embassies, retaliatory raids, and the
Reagan get-tough-on-terrorists laws. The theoretical model for the terrorists that underlies
their study is analogous to the consumer-choice model. Terrorists maximize utility or expected
utility derived from the consumption of basic commodities, produced from terrorist and
nonterrorist activities. For example, al-Qaida terrorists may gain utility from a reduced political
resolve on the part of the United States to remain in the Persian Gulf as Americans lose their
lives in terrorist attacks (e.g., the destruction of the Al Khubar Towers housing US airmen and
others on 25 June 1996 near Dhahran, Saudi Arabia). This weakening of US resolve is the basic
commodity that can be produced with a number of alternative attack modes. Substitution
20
possibilities among terrorist tactics arise when alternative modes of operations produce the same
basic commodities (e.g., political instability, media attention) in varying amounts. Substitution
is enhanced when attack modes possess closely related outcomes and are logistically similar.
This is clearly the case for hijackings and other kinds of hostage events. Complementarity
results when combinations of attack modes are required to produce one or more basic
commodities. When threats follow real attacks, both actions assume a heightened effectiveness
and are thus complementary.
To produce these basic commodities, a terrorist group must choose between nonterrorist
and terrorist activities, while being constrained by resources. In the latter choice, terrorists must
further choose between different modes of terrorist attacks based on the perceived prices
associated with alternative operations. Choices are many and include the intended lethality of
the act, its country of location, and whom or what to target. The expenditure on any activity
consists of its per-unit price times the activitys level. Each mode of operation has a per-unit
price that includes the value of time, resources, and anticipated risk to accomplish the act. The
securing and maintenance of a kidnapping victim in a hidden location is logistically more
complex and requires more resources than leaving a small bomb in a trash bin in a railroad
station, so that the former has a greater per-unit price. In choosing a venue, the price differs
based on security measures taken by the authorities; a country with more porous borders will be
the staging ground for attacks against targets from other more secure countries. The prices
confronting the terrorists for each tactic are determined, in large part, by the governments
allocation of resources to thwart various acts of terrorism. If, for example, embassies are
fortified, then attacks against embassy personnel and property within the missions ground
become more costly for the terrorists i.e., there is a rise in the relative price of such attacks.
Similarly, metal detectors in airports increase the relative price of skyjackings as compared with
21
other kinds of terrorist acts, including kidnappings.
Government policies aimed at a single type of terrorist event (e.g., the installation of
bomb-sniffing equipment in airports) adversely changes its relative price and results in a
substitution into now less expense modes of attack. Thus, Landes (1978) measure of the
success of metal detectors, in terms of fewer skyjackings, does not go far enough, because the
application of this technology may have induced a large number of other kinds of events.
Similarly, to judge the success of embassy fortification, a researcher must also examine
assassinations and other attacks against embassy personnel, once outside of the compound.
To account for these substitutions, Enders and Sandler (1993) apply vector autoregression
(VAR) analysis to allow for the potential interactions among various terrorist time series (e.g.,
skyjackings and other hostage events) in response to government policies. They find that metal
detectors decreased skyjackings and threats, but increased other kinds of hostage incidents, not
protected by detectors. The trade-off between events were about one for one (also see Enders,
Sandler, and Cauley, 1990; Im, Cauley, and Sandler, 1987). Both substitutions and
complementarities are uncovered. Fortification of US embassies and missions reduced attacks
against such installations, but were tied to a disturbing increase in assassinations of officials and
military personnel outside of protected compounds. In addition, Enders and Sandler (1993)
establish that the US retaliatory raid against Libya on April 1986 (for its suspected involvement
in La Belle Discothque in West Berlin on 4 April 1986) was associated with an immediate
increase in terrorist attacks against US and UK interests. This increase was shortly followed by a
temporary lull as terrorists built up depleted resources. Apparently, the raid caused terrorists to
intertemporally substitute attacks planned for the future into the present to protest the retaliation.
Within a relatively few quarters, terrorist attacks resumed the same mean number of events.
There are a number of ways to institute antiterrorist policies that address these likely
22
substitutions and complementarities. First, the government must make the terrorists substitute
into less harmful events. Second, the government must go after the terrorists resource
endowment (i.e., its finances, its leadership, and its membership) if an overall decrease in
terrorism is to follow. Efforts to infiltrate groups or to freeze terrorists finances have this
consequence. Third, the government must simultaneously target a wide range of terrorist attack
modes, so that the overall rise in the prices of terrorist attacks becomes analogous to a decrease
in resources. Success in raising the price of all modes of terrorist attacks would induce terrorists
to shift into legal protests and other nonterrorist actions to air grievances. Based on the above,
we can conclude that a reliance on technological barriers merely causes a substitution into other
attack modes in the short run. In the long term, terrorists will develop ingenuous
countermeasures (i.e., plastic guns, bottles of flammable liquid) to circumvent the technology.
This terrorist response is an innovation effect, which gives rise to a dynamic strategic interaction.
Consequently, authorities must be ever vigilant to improve the technology by anticipating
terrorists ways of circumventing such barriers. This vigilance must lead to periodic upgrades in
the technology prior to the terrorists exposing the technologys weakness through a successful
attack. Unfortunately, authorities have been reactive by only responding after a technological
barriers weakness has been exploited, so that the public remains vulnerable until a new
technological fix is found and installed.
Other kinds of substitutions
Substitution effects abound in the study of terrorism and involve not only actions of the
terrorists, as described above, but also actions of the targets. For targets, the economic literature
addresses two kinds of substitutions. First, there are studies that examine the tourists choice of
vacation spot based on the perceived threat of terrorism and other costs. An alteration in travel
23
risks, arising from increased terrorist incidents in a country, raises the price of a holiday there in
comparison to other vacation venues, not confronted with terrorism. In a study of Spain, Enders
and Sandler (1991) employ VAR analysis to demonstrate that a typical transnational terrorist
incident is estimated as scaring away just over 140,000 tourists when all monthly impacts are
combined. Companion studies by Enders, Sandler, and Parise (1992) and Drakos and Kutan
(2003) establish and quantify terrorism-induced substitutions in tourism for Greece, Austria,
Italy, Turkey, Israel, and other terrorism-ridden countries. Countries, like Greece, that have not
addressed transnational terrorist attacks directed at foreigners lose significant foreign-exchange
earnings as a consequence. The cost of terrorism comes in many forms.
Second, target-based substitutions involve foreign direct investment (FDI). Investors
decide where to invest based on their perceived economic risks, political risks, and monetary
returns. An increase in transnational terrorism directed at FDI (e.g., attacks by Euskadi ta
Askatasuna (ETA) in the Basque region of Spain) is sure to divert such investment. Enders and
Sandler (1996) show that an average years worth of terrorism reduced net FDI in Spain by
13.5% annually, and it reduced net FDI in Greece by 11.9% annually. These reductions
translated into declines in real net FDI of $488.9 million and $383.5 million, respectively, or the
equivalent of 7.6% and 34.8% of annual gross fixed capital formation in Spain and Greece.
Transnational terrorism displayed significant economic cost, not counting the billions spent on
barriers and deterrence. In a more recent study of the Basque region, Abadie and Gardeazal
(2003) establish that terrorism reduced per capita GDP by ten percentage points in relation to the
terrorism-free synthetic control region.
Studies of risks
After 9/11, there is greater interest in applying economic methods to study antiterrorism
24
policy choices. One useful line of study examines interdependent security (IDS) risks where the
effectiveness of the protective actions by one agent is highly dependent on those of other agents
(Heal and Kunreuther, 2004; Kunreuther and Heal, 2003). If, e.g., luggage in the cargo hold of a
commercial plane is not rechecked during transfer, then airlines incentives to invest in screening
their own luggage are diminished because the safety of the flight is dependent on exogenous
factors. These authors show that a variety of game forms may apply. They also make policy
recommendations to create tipping and cascading equilibriums, whereby firms become more
motivated to augment their own security as transferred luggage of key carriers (i.e., those with
the greatest number of feeder flights) become safely screened. To achieve these equilibriums,
government must target airline subsidies to key carriers. There are many IDS concerns
associated with protective measures against terrorist attacks in a globalized world.
Economists are also interested in the insurance implications of terrorism, since extreme
events such as 9/11 are very costly about $90 billion in losses (Kunreuther, Michel-Kerjan, and
Porter, 2003) and virtually impossible to predict. Following 9/11, most insurers dropped their
terrorism coverage or made it prohibitively expensive. Terrorism coverage raises public policy
issues e.g., should the government provide coverage and, if so, how should public and private
coverage interface? Clearly, economics can be fruitfully applied to such problems.
VII. Toward a Benefit-Cost Analysis of Terrorist-Thwarting Policies
As a future research project, economists should assess the benefits and cost of specific
policies to thwart terrorism. Such an exercise has not been adequately done and poses some real
challenges. Costs are fairly straightforward since figures are available in, say, the United States
as to what is paid to fortify embassies and missions, or to guard US airports. Consider the cost
25
associated with airport security. The value of lost time as travelers are screened must be added
to the cost of guards and screening equipment.
On the benefit side, calculations are less transparent. One way to estimate a portion of
this benefit would be to compute the reduced loss of life attributable to airport security measures
i.e., fewer people killed in skyjackings. If the net number of such lives saved, after adjusting
for substitutions into other life-threatening terrorist actions, can be measured, then the average
value of a statistical life can be applied to translate these lives into a monetary figure. To this
figure, a researcher must also compute and add the reduced losses in property values (i.e., from
destroyed planes) attributable to the fewer hijackings. In addition, a portion of the value of net
air travel revenues must be considered as a benefit arising from a heightened sense of security
stemming from security upgrades. The events of 9/11 clearly underscore that there is a cost to a
breach in airport security as the public loses its confidence in air travel. Any of these
components are fraught with measurement difficulties, because there may be intervening factors
at work e.g., air travel was already in a slump prior to 9/11.
Every policy to thwart terrorism would entail its own stream of benefits and costs.
Invariably, the benefit calculations are problematic. The US-led retaliation against al-Qaida and
the Taliban in Afghanistan has well-defined costs in terms of deployed soldiers, ordnance,
diplomacy, and side payments to allies. But the true savings or benefits from fewer future acts
of terrorism, in terms of lives and property saved, is so much more difficult to calculate as they
require counterfactual information. Time-series techniques, engineered by Enders and Sandler
(1991, 1996) to measure losses to tourism or to FDI from terrorism, can be utilized following the
retaliation to roughly estimate the decline in terrorist incidents and their economic value.
VIII. Concluding Remarks
26
Although economic methods have enlightened the public on a number of issues
concerning transnational terrorism, there are many other issues to analyze. For instance, there is
a need for applying more dynamic game methods i.e., differential game theory if the waxing
and waning of terrorist organizations (e.g., Red Brigades and Red Army Faction) are to be
understood. Clearly, past successes and failures determine the size of these groups over time.
The terrorists try to increase their organizations size through enhanced resources, successful
operations, and recruitment, while the government tries to limit the groups size through raids,
intelligence, group infiltration, and actions to thwart successes. This dynamic strategic
interaction needs to be modeled and empirically tested. In addition, researchers must better
assess the role of information and intelligence on behalf of the terrorists and the authorities.
Given how little governments really know about the strength of the terrorists that they confront
e.g., the US government had almost no clue about the size of al-Qaida (US Department of State,
2001, p. 69) prior to 9/11 asymmetric information characterizes efforts to thwart terrorism.
Similarly, the terrorists are ill-informed about the resolve of the government and the amount of
resources that it is willing to assign to curbing terrorism. Additionally, there is a need to model
terrorist campaigns i.e., the choice of the sequence and composition of attacks used by
terrorists. As researchers better understand these choices, more effective policy responses can be
devised that adjust for the strategic interaction. Another unresearched issue is the optimal choice
between proactive and defensive antiterrorism policies. Arce and Sandler (2004) show that
governments have a proclivity to favor defensive policies when confronting transnational
terrorism, but these authors do not indicate the optimal mix.
27
References
Abadie, Alberto and Javier Gardeazabal. 2003. The Economic Costs of Conflict: A Case
Study of the Basque Country, American Economic Review, 93, 113132.
Alexander, Yonah and Dennis Pluchinsky. 1992. Europes Red Terrorists: The Fighting
Arce M. Daniel G. and Todd Sandler. 2004. Counterterrorism: a Game-Theoretic Analysis,
Los Angeles, CA: School of International Relations, University of Southern California
(unpublished manuscript).
Framework, Journal of Law and Economics, 30, 121.
Azam, Jean-Paul. Forthcoming. Suicide-Bombing on Inter-Generational Investment, Public
Choice.
Brophy-Baermann, Brian and John A.C. Conybeare. 1994. Retaliating against Terrorism:
Rational Expectations and the Optimality of Rules Versus Discretion, American Journal
of Political Science, 38, 196210.
Cauley, John and Eric I. Im. 1988. Intervention Policy Analysis of Skyjackings and Other
Terrorist Incidents, American Economic Association Papers and Proceedings, 78, 27
31.
Chalk, Peter, 1995. The Liberal Democratic Response to Terrorism, Terrorism and Political
Violence, 7, 1044.
Drakos, Kostas and Ali M. Kutan. 2003 Regional Effects of Terrorism on Tourism: Evidence
from Three Mediterranean Countries, Journal of Conflict Resolution, 47, 621641.
Enders, Walter and Todd Sandler. 1991. Causality Between Transnational Terrorism and
Tourism: The Case of Spain, Terrorism, 14, 4958.
28
_____. 1993. The Effectiveness of Anti-Terrorism Policies: Vector-Autoregression
Intervention Analysis, American Political Science Review, 87, 829844.
_____. 1996. Terrorism and Foreign Direct Investment in Spain and Greece, Kyklos, 49,
331352.
_____. 1999. Transnational Terrorism in the Post-Cold War Era, International Studies
Quarterly, 43, 145167.
_____. 2000. Is Transnational Terrorism Becoming More Threatening, Journal of Conflict
Resolution, 44, 307332.
_____. 2002. Patterns of Transnational Terrorism 1970-99: Alternative Time Series
Estimates, International Studies Quarterly, 46, 145165.
Enders, Walter, Gerald F. Parise, and Todd Sandler. 1992. A Time-Series Analysis of
Transnational Terrorism: Trends and Cycles, Defence Economics, 3, 305320.
Retaliation in the Fight against Terrorism: An Econometric Evaluation, Terrorism and
Political Violence, 2, 83105.
Enders, Walter, Todd Sandler, and Gerald F. Parise. 1992. An Econometric Analysis of the
Impact of Terrorism on Tourism, Kyklos, 45, 531554.
Faria, Joo. 2003. Terror Cycles, Studies in Nonlinear Dynamics and Econometrics, 7,
Article 3, http://www.bepress.com/snde.
Heal, Geoffrey and Howard Kunreuther. 2004. IDS Models and Airline Security, New York,
NY: Graduate School of Business, Columbia University (unpublished manuscript).
Hoffman, Bruce. 1997. The Confluence of International and Domestic Trends in Terrorism,
Terrorism and Political Violence, 9, 115.
_____. 1998. Inside Terrorism. New York: Columbia Univ. Press.
29
Activities: A Spectral Approach, Kyklos, 40, 238255.
Islam, Muhammad Q. and Wassim N. Shahin. 1989. Economic Metholdology Applied to
Political Hostage-Taking in Light of the Iran-Contra Affair, Southern Economic
Journal, 55, 10191024.
Kunreuther, Howard and Geoffrey Heal. 2003. Interdependent Security, Journal of Risk and
Uncertainty, 26, 231249.
Kunreuther, Howard, Erwann Michel-Kerjan, and Beverly Porter. 2003. Assessing, Managing
and Financing Extreme Events: Dealing with Terrorism, Working Paper No. 10179,
National Bureau of Economic Research, Cambridge, MA.
Kupperman, Richard N. 1987. Vulnerable America, in Paul Wilkinson and A.M. Stewart
(eds.), Contemporary Research on Terrorism, Aberdeen, UK: University of Aberdeen
Press, pp. 570-580.
Landes, William M. 1978. An Economic Study of US Aircraft Hijackings, 1961-1976,
Journal of Law and Economics, 21, 131.
Lapan, Harvey E. and Todd Sandler. 1988. To Bargain or Not to Bargain: That is the
Question, American Economic Association Papers and Proceedings, 78, 1620.
_____. 1993. Terrorism and Signalling, European Journal of Political Economy, 9, 383397.
Lee, Dwight R. 1988. Free Riding and Paid Riding in the Fight against Terrorism, American
Economic Papers and Proceedings, 78, 2226.
Mickolus, Edward F. 1982. International Terrorism: Attributes of Terrorist Events, 1968-1977
(ITERATE 2). Ann Arbor, MI: Inter-University Consortium for Political and Social
Research.
Mickolus, Edward F., Todd Sandler, Jean M. Murdock, and Peter Flemming. 2004.
30
International Terrorism: Attributes of Terrorist Events, 1968-2003 (ITERATE 5). Dunn
Loring, VA: Vinyard Software.
Overgaard, Per B. 1994. Terrorist Attacks as a Signal of Resources, Journal of Conflict
Resolution, 38, 45278.
Sandler, Todd. 1997. Global Challenges. Cambridge: Cambridge Univ. Press.
_____. Forthcoming. Collective versus Unilateral Responses to Terrorism, Public Choice.
Sandler, Todd and Daniel G. Arce M. 2003. Terrorism & Game Theory, Simulation &
Gaming, 34, 319337.
Terrorists Choice of Targets, Synthse, 76, 245-261.
Sandler, Todd and John L. Scott. 1987. Terrorist Success in Hostage-Taking Incidents,
Journal of Conflict Resolution, 31, 3553.
Sandler, Todd and Kevin Siqueira. 2003. Global Terrorism: Deterrence versus Preemption,
Los Angeles: School of International Relations, University of Southern California
(unpublished manuscript).
Sandler, Todd, John T. Tschirhart, and Jon Cauley. 1983. A Theoretical Analysis of
Transnational Terrorism, American Political Science Review, 77, 3654.
Scott, John L. 1991. Reputation Building in Hostage Incidents, Defence Economics, 2,
209218.
Selten, Reinhard. 1988. A Simple Game Model of Kidnappings, in Reinhard Selten (ed.),
Models of Strategic Rationality, Boston: Kluwer Academic, pp. 7793.
Shahin, Wassim N. and Muhammad Q. Islam. 1992. Combating Political Hostage-Taking: An
Alternative Approach, Defence Economics, 3, 3217.
United States Department of State, Various years. Patterns of Global Terrorism. Washington,
31
_____. 2001. Terrorism versus Democracy: The Liberal State Response. London: Frank Cass.
TABLE 1: Transnational Terrorism: Events 1968-2003

Year
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
Number of Events
208
202
355
426
395
274
304
296
440
322
431
363
565
437
375
605
665
612
635
565
497
487
489
499
434
530
419
457
382
394
345
558
264
309
193
125
Deaths
625
725
3,296
405
233
741
221
314
163
314
109
93
102
200
193
407
612
604
825
312
637
128
168
507
697
435
230
409
266
311
121
151
36
127
56
34
Wounded
3,646
2,013
2,283
791
706
5,952
693
2,652
6,291
663
1,393
636
233
675
397
1,131
2,272
1,717
1,217
967
1,267
755
804
1,062
542
629
404
806
516
879
199
390
225
209
190
207
84
77
219
200
169
111
123
73
90
66
88
142
308
197
193
185
149
204
170
133
199
208
159
169
157
215
158
164
139
151
152
177
190
202
110
57
Source: US Department of State, Patterns of Global Terrorism (1988-2003) and tables provided to Todd
Sandler in 1988 by the US Department of State, Office of the Ambassador at Large for Counterterrorism.
FIGURE 1: All Incidents and Bombings, 1968-2003

350
All
300
Bombings
250
200
150
100
50
0
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
FIGURE 2: Assassinations and Hostage Incidents, 1968-2003

35
Assassinations
30
Hostage Incidents
25
20
15
10
0
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
FIGURE 3: Proportion of Incidents with Casualities, 1968-2003

100
90
80
70
Percent
60
50
40
30
20
10
0
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
FIGURE 4: Proportions of Bombings and Hostage Incidents, 1968-2003

100
Hostage Incidents
Bombings
90
80
70
Percent
60
50
40
30
20
10
0
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
TABLE 2: Trend and Other Statistical Properties of Transnational Terrorist Incidents, 1968-2003
Constanta
2.916
(2.009)
Time
0.244
(5.120)
(Time)2
0.002
(4.839)
Bombings
37.710
(5.916)
0.954
(4.637)
0.008
(6.040)
Threats & Hoaxes
6.024
(1.940)
0.061
(0.326)
0.006
(1.811)
Assassinations
1.069
(0.976
0.379
(10.716)
Casualties
5.112
(2.138)
0.810
(10.494)
Incident Type
Hostage taking
All Events
(Time)3
Fstatb
13.83
[0.000]
Variance
31.837
Percentc
0.311
30.296
[0.000]
624.310
0.241
15.011
[0.000]
79.431
0.263
0.003
(11.371)
65.367
[0.000]
18.126
0.393
0.006
(10.811)
58.444
[0.000]
86.454
0.391
0.000
(2.854)
43.075
2.293
0.018
44.240
1256.651
0.222
(4.725)
(7.790)
(8.855)
[0.000]
a
t-ratios are in parentheses.
b
Prob values are in brackets under the F-statistics.
c
Proportion of variance of the detrended, fitted-polynomial series that is accounted for by the lowest
15 percent of the frequencies (i.e., the longest cycles).
FIGURE 5: Game Theory for Hostage Event
Government chooses deterrence

D(q)
Terrorists decide whether or not to attack
ck
At
A W
1
ck
ta
W
es
c
uc
lS
ica q
st 1 -
i
og
st
l
ica
gi
re
lu
ai
Lo
D(q)
0
Government response
i
ap
tc
no p
s 1-
it
te
la
tu
p
Ca
te
a
ul
oe
a + D(q)
-c
No
tta
h + D(q)
m
n + D(q)
~
m
Arce M., Sandler / COUNTERTERRORISM

JOURNAL
ARTICLE OF CONFLICT RESOLUTION
10.1177/0022002704272863
Counterterrorism
A GAME-THEORETIC ANALYSIS
DANIEL G. ARCE M.
Rhodes College
TODD SANDLER
This article establishes the prevalence of deterrence over preemption when targeted governments can
choose between either policies or employ both. There is a similar proclivity to favor defensive counterterrorist measures over proactive policies. Unfortunately, this predisposition results in an equilibrium with
socially inferior payoffs when compared with proactive responses. Proactive policies tend to provide purely
public benefits to all potential targets and are usually undersupplied, whereas defensive policies tend to yield
a strong share of provider-specific benefits and are often oversupplied. When terrorists direct a disproportionate number of attacks at one government, its reliance on defensive measures can disappear. Ironically,
terrorists can assist governments in addressing coordination dilemmas associated with some antiterrorist
policies by targeting some countries more often than others.
Keywords: counterterrorism; deterrence; preemption; terrorism; noncooperative game; Nash
equilibrium
subnational groups to obtain political, religious, or ideological objectives through

intimidation of a large audience usually beyond that of the immediate victims.1 By
simulating randomness, terrorists create an atmosphere of fear where everyone feels
vulnerable, thereby extending their sphere of influence as far as possible. Suicide missions can heighten this air of anxiety and place greater pressures on governments to
capitulate to terrorist demands owing to the greater casualties, on average, associated
with such eventsthirteen deaths per suicide attack compared with less than one
1. This definition combines essential features of definitions in the literature; see Hoffman (1998,
chap. 1) and Schmid and Jongman (1988).
AUTHORSNOTE: Daniel G. Arce M. is the Robert D. McCallum Distinguished Professor of Economics and Business at Rhodes College. Todd Sandler is the Robert R. and Katheryn A. Dockson Professor of
International Relations and Economics at the University of Southern California. The authors have profited
from the comments of two anonymous reviewers.
JOURNAL OF CONFLICT RESOLUTION, V 49 No. 2, April 2005 183-200
ol.
DOI: 10.1177/0022002704272863
2005 Sage Publications
183
184
JOURNAL OF CONFLICT RESOLUTION
death per nonsuicide attack (Pape 2003). In this regards, the events of September 11,
2001 (henceforth 9/11), made the public and governments painfully aware of the risks
posed by the new breed of suicide and fundamentalist terrorists bent on maximal casualties. Following 9/11, governments have spent tens of billions of dollars on a variety
of antiterrorist policies. Since 2002, the budget supporting the newly created U.S.
Department of Homeland Security grew by more than 60 percent to $36.2 billion for
fiscal year 2004 (Office of Management and Budget 2003).
Counterterrorist policies may involve taking direct actions against terrorists or their
sponsors. Such proactive policies may include destroying terrorist training camps,
retaliating against a state sponsor, infiltrating terrorist groups, gathering intelligence,
or freezing terrorist assets. Preemption is the quintessential proactive policy in which
terrorists and their assets are attacked to curb subsequent terrorist campaigns. More
defensive or passive counterterrorist measures include erecting technological barriers
(e.g., metal detectors or bomb-sniffing equipment at airports), fortifying potential targets, and securing borders. These defensive policies are intended to deter an attack by
either making success more difficult or increasing the likely negative consequences to
the perpetrator.2 Efforts to deter terrorist events often displace the attack to other venues, modes of attack (e.g., from a skyjacking to a kidnapping), countries, or regions,
where targets are relatively softer (Drakos and Kutan 2003; Enders and Sandler 1993;
Sandler and Enders 2004; Sandler 2003).
By protecting all potential targets, preemption provides public benefits; in contrast,
by deflecting the attack to relatively less-guarded targets, deterrence and/or defensive
measures impose public costs. The irony arises because nations have a pronounced
proclivity to resort to deterrence rather than preemption despite the greater social gains
usually associated with the latter. The primary purpose of this article is to apply elementary game theory to explain this tendency. Unlike a recent paper (Sandler and
Siqueira 2003) that examines deterrence and preemption in isolation, the current exercise allows governments to choose between these policies or to employ them together.
Although we allow alternative game forms to characterize both policies, deterrence is
shown to have an unfortunate dominance over preemption, consistent with what is
observed in the real world. A second major purpose is to investigate the game structure
of other defensive and proactive counterterrorist policies. A variety of game forms are
relevant, not only among different antiterrorist measures but also for the same measure
under alternative scenarios. The analysis also identifies the circumstances when
preemption may result owing to payoff asymmetries between targets or policies.
Game theory is an appropriate tool for investigating counterterrorism because it
captures the strategic interactions between terrorists and targeted governments whose
choices are interdependent.3 In so doing, game theory permits a rich range of strategic
2. Our use of deterrence follows that in the terrorist literature (Sandler and Enders 2004), in which
deterrence limits or restrains a particular action (e.g., metal detectors made hijackings more difficult and
greatly reduced attempted hijackings). We do not use deterrence in the cold war sense of inhibiting an action
necessarily through a threatened punishment.
3. Past articles have applied game theory to evaluate hostage negotiations (Atkinson, Sandler, and
Tschirhart 1987; Lapan and Sandler 1988; Sandler, Tschirhart, and Cauley 1983; Selten 1988), terrorists
choice of targets (Sandler and Arce M. 2003; Sandler and Lapan 1988), and terroristsallocation of resources
under asymmetric information (Lapan and Sandler 1993; Overgaard 1994).
Preempt
Preempt
US
2,2
EU
Status quo
2,4
Status quo
4, 2
0,0
Deter
6, 6
2, 4
185
Deter
6,6
4,2
Nash
2, 2
Figure 1: Deterrence versus Preemption: Symmetric Benefits and Costs

NOTE: EU = European Union.
environments and policy choices in keeping with modern-day terrorist threats. Moreover, game theory assumes that each player is rational and must second-guess its
adversaries; thus, a government must place itself in its opponents position before
deciding the appropriate strategic response. To decide the best strategy, a government
must anticipate not only the actions of terrorists but also those of other governments
that might work at cross-purposes or take advantage of another governments action.
In todays world of networked terrorists where the threat is global, accounting for
these reactions of other governments is essential to the formulation of effective
counterterrorist policies.
PREEMPTION OR DETERRENCE: SPECIFIC EXAMPLE
Any strategic analysis of the choice between preemption or deterrence must
account for preemptions purely public benefits to all potential targets: direct action
against terrorists or their sponsors makes everyone safer.4 In contrast, a strategic representation of deterrence must account for the costs imposed on the nation that deters an
attack as well as the public costs incurred by others from the increased likelihood of
having an attack deflected to their soil. The deterrer must not only expend resources to
make its territory a less attractive venue but also suffers costs from having its people or
property targeted abroad. Deterrence spending is analogous to an insurance policy that
is paid regardless of the outcome, but in bad states (when an attack ensues), deterrence
curbs the expected damage at home, which is the deterrers private benefit.
4. Everyone is safer insofar as a weakened terrorist threat means that all potential targets have less to
fear. There is, however, a qualification: heavy-handed preemption may create anger and new recruits,
thereby jointly producing a public bad (Rosendorff and Sandler 2004). The analysis here holds, provided that
the pure public benefit from preemption-induced threat reduction outweighs any associated public costs
from new recruits to the terrorist cause. Inclusion of recruitment costs would reinforce our findings that
deterrence is favored to preemption.
186
To illustrate the dilemma posed by counterterrorist policies, we use a specific

example in which two targetsthe United States and the European Union (EU)
must choose preemption or deterrence. Both players can also do nothing, denoted by
the status quo. The passive player is the terrorist group that is bent on attacking the
weaker of the two targets or flipping a coin if neither is weaker. For illustration, each
preemptive action provides a public benefit of 4 for the United States and EU at a private cost of 6 to the preemptor. In Figure 1, the preemption game is captured by the
northwest 2 2 bold-bordered matrix, in which each government can preempt or
maintain the status quo. If, say, the United States preempts, then it gains a net benefit of
2 (= 4 6) while conferring a free-rider gain of 4 on the EU. These payoffs are
reversed if the roles are switched. When both governments preempt, each receives a
net gain of 2 as its preemption expense of 6 is deducted from gains of 8 (= 4 2)
derived from both targets efforts. Neither country acting gives zero net benefits to
both players. This 2 2 preemption game is a prisoners dilemma (PD) with inaction as
the dominant strategy since 4 > 2 and 0 > 2. The resulting Nash equilibrium is mutual
status quo(Status Quo, Status Quo)from which neither target would unilaterally
move. This equilibrium is Pareto dominated by mutual action (preemption).
Next, we turn to the 2 2 deterrence game displayed by the southeast 2 2 boldbordered matrix in Figure 1, in which the players have two strategies: do nothing or
deter an attack at home. In this stylized symmetric example, we assume that deterrence
is associated with a public cost of 4 experienced by the deterrer and the other country.
The deterrers costs arise from the action and its potential losses from a deflected
attack (say, from its citizens residing abroad), while the nondeterrer suffers the deflection costs of being the target of choice. A deterrer is motivated by private gains of 6
prior to costs being deducted. If, say, the EU deters alone, then it nets 2 (= 6 4), while
the United States loses 4 by becoming the target of choice. Payoffs are switched when
the United States deters alone. Net benefits are zero if neither acts, while each receives
a net payoff of 2 [= 6 (4 2)] from mutual deterrence as costs of 8 are deducted from
a private gain of 6. Once again, a PD game results. Now, the dominant strategy is action
(Deter) rather than inaction, and the Nash equilibrium is (Deter, Deter).
The real issue is which counterterrorism policy dominates if each target can choose
either policy or the status quo. This can be addressed by consulting the 3 3 matrix of
Figure 1 with its two embedded PD games. If one player deters and the other preempts,
then the deterrer gains 6 (= 6 + 4 4), while the preemptor receives 6 (= 4 6 4). The
deterrer gets a private benefit of 6 from its deterrence and a public benefit of 4 from the
other players preemption but must cover its deterrence cost of 4. In contrast, the sole
preemptor suffers a cost of 4 from the other players deterrence and a cost of 6 from its
own efforts but only receives a private benefit of 4 from preempting. The other payoffs
in the matrix remain as before.
The dominant strategy is for both players to deter since the payoffs are higher than
the corresponding payoffs associated with the other two strategies. As both targets
exercise their dominant strategy, the Nash equilibrium of (Deter, Deter) follows. This
outcome is like a double PD game in which the smallest summed payoff results
every other strategic combination is socially preferred from an aggregate payoff viewpoint. Of the two Nash equilibria of the embedded and overlapping 2 2 PD games,
Preempt
EU
Status quo
Preempt
US
2B c,2B c
Bc, B
Status quo
B, B c
187
Deter
B c C, B + b C
0,0
C, b C
Nash
Deter
B + b C, B c C
b C , C
b 2C , b 2C
Figure 2: Generalized Deterrence-Preemption Game, 2B > c > B and 2C > b > C

the Pareto-inferior equilibrium reigns. In the 3 3 game, the sum of the payoffs
decreases when moving down the columns, but the strategy in the bottom row dominates; similarly, the sums of the payoffs decrease when moving rightward along a row,
but the strategy in the right-most column dominates. This outcome is rather fascinating
and disturbing; it implies that deterrence wins out over preemption when payoffs mirror one another in that the public versus private roles of benefits and costs are
switched.5 There is an implied resilience to deterrence in this stylized example. Is this
example reflective of more generalized situations where benefits and costs do not
merely switch roles in terms of values for the two policies, or alternative game forms
apply, or players are asymmetric? We now analyze more general representations to
address this question.
GENERALIZED DETERRENCE-PREEMPTION ANALYSIS
In this section, the generalized game no longer assumes that the public costs of
deterrence equal the public benefits of preemption or that the private benefits of deterrence equal the private costs of preemption. In terms of notation, B denotes the public
benefits of preemption, c represents the private costs of preemption; C denotes the
public costs of deterrence, and b represents the private benefits of deterrence. The
(re)actions of terrorists in this model are suppressed because they are consistent with
the public aspects of deterrence and preemption produced in conjunction with terrorist
activity, as explicitly derived by Sandler and Siqueira (2003) and Sandler and Arce
(2003).6 The generalized game is in Figure 2, where the overlapping 2 2 preemption
and deterrence games are again highlighted by boldfaced borders. In the northwest 2
2 preemption game, the pure publicness of preemption is a key feature. If there is a sole
preemptor, then that player affords a free ride worth B to the other nation and receives a
5. With an alternative solution concept, such as nonmyopic equilibria in the theory of moves
(Brams 1994), the Pareto-efficient solution might be achieved. This investigation is left to our future work.
6. Heal and Kunreuther (2005 [this issue]) make a similar assumption in a study that focused only on
defensive policies.
188
net benefit of B c. We initially assume that the costs of preemption exceed the associated benefits so that c > B. If both countries preempt, then each receives 2B c as costs
are deducted from the benefits derived from the combined actions of the two governments (i.e., B from each preemption for a total of 2B). To ensure that a PD game results,
we must assume that B > 2B c, which again implies that c > B. Also, we assume that
the payoff from mutual preemption is greater than that from mutual inaction so that 2B
c > 0.7 Taken together, the inequality 2B > c > B is sufficient to ensure that a PD game
characterizes the northwest 2 2 preemption game. The dominant strategy for this
embedded game is to do nothing, which results in the Nash inactivity equilibrium with
a payoff of (0, 0). The southeast 2 2 bold-bordered matrix indicates the deterrence
game, in which payoffs are computed as before. To ensure a PD game, we assume that
2C > b > C. The dominant strategy of this embedded game is to deter, and the Nash
equilibrium is mutual deterrence.
For the 3 3 game, there are also the two strategic combinations in which one
player deters and the other preempts. The deterrer then receives B + b C from the
associated public gain from preempting, B, and the private gain from deterring, b,
minus the public deterrence costs, C. The preemptor gains the public preemption benefit but must cover the private costs of preempting and the public costs of its counterparts deterrence for a payoff of B c C. The two sets of inequalities ensure that the
dominant strategy is to deter for both governments so that the Nash equilibrium of
mutual deterrence results, which is Pareto inferior to doing nothing or mutual preemption. Thus, this first generalization of the game, denoted as the baseline game, does not
eliminate the persistence of deterrence.8
Because targeted countries may face the same situation in each period, we examine
when mutual preemption can be supported in an infinitely repeated game with a discount factor of . Suppose that a grim-trigger strategy is employed in which a player
begins by preempting but will henceforth switch to deterrence if the other player ever
fails to preempt, so that a deterrence trigger is employed. Preemption is then sustained if 9
7. This last inequality also rules out any oscillatory supergame equilibrium in which alternating
between the off-diagonal cells does better than mutual preemption. This means that 2B c > .5B + .5(B c),
which implies that 2B > c.
8. The same bias against proactive policy and reliance on defensive measures is not anticipated for
domestic antiterrorist policy because the central government can internalize the public benefit from
proactive responses. A weakened domestic terrorist group benefits just the host country, whose taxes can
support a proactive campaign. Similarly, a central government can balance the external deflection costs from
defensive actions. For transnational terrorism, there is no supranational government that can internalize
external benefits and costs from proactive and defensive policies, respectively.
9. To derive this inequality, we must assume that the present value of the perpetual gain from mutual
preemption, (2B c)/(1 ), exceeds the gain from deterring in the first period and then suffering the punishment payoff of mutual deterrence thereafter. This implies that
2B c
B + b C + ( b 2 C ) + ( b 2 C ) 2 + ... ,
1
or
( b 2C )
2B c
,
B + b C ( b 2C ) +
1
1
from which equation (1) follows with some algebra.
[(b C) (B c)]/(B + C).
189
(1)
Based on equation (1), the smaller is the incentive for unilateral deterrence, b C, and
the smaller is the net cost of unilateral preemption, B c, the more likely it is to sustain
mutual preemption through a threat-based trigger. This inequality also holds if
[(b + c) (B + C)]/(B + C).
(2)
which indicates that mutual preemption has a better chance when the sum of public
costs and benefits is large compared with the sum of private costs and benefits. Equation (2) highlights that private motivation must be small compared with external influences for a threat-based trigger to induce cooperation. Of course, the sustainability of
mutual preemption also hinges on the discount factor being large so that the future is
valued sufficiently.
Two problems must be resolved to secure mutual preemption through a threatbased trigger. First, mutual deterrence remains an equilibrium; thus, parties must
agree to coordinate and move from deterrence to preemption. Second, sustaining
mutual preemption may conflict with the short-run viewpoint taken by governments
owing to election periods that limit tenure. The results for the infinitely repeated version of Figure 2 are equivalent to those for a finite, but indefinitely, repeated version
where is the probability that the current period is not the last.10 If represents the
probability of reelection, then this may be quite low owing to term limits or other considerations, which then work against sustaining preemption through threat-based triggers. Thus, we must look elsewhere for supporting preemption. Ironically, the lifetime
tenure of terrorist leaders supports the widespread cooperation that characterizes terrorist groups since the 1960s. 11
MUTUAL INACTION IS DISASTROUS
Next, we change one payoff combination in Figure 2that of mutual status quo,
where the two embedded 2 2 games overlap. In particular, we change this payoff to
(D, D) (not shown in Figure 2) so that mutual inaction is disastrous in the sense
that this payoff is less than the sucker payoffs of the embedded preemption and deterrence games. Thus, the payoff, , from the mutual status quo must satisfy
D = (Status Quo, Status Quo) < min{B c, C}.
(3)
This inequality ensures that the 2 2 preemption game is now a chicken game with
pure-strategy Nash equilibria of unilateral preemption. The dominant strategy for the
associated 3 3 game is still deterrence with a single Nash equilibrium of (Deter,
Deter) that makes at least one player worse off than the equilibria of the embedded 2
2 preemption chicken game.12 The Nash equilibrium of the embedded deterrence
10. The expected length of such a game is 1/(1 ).
11. On terrorist networks, see Alexander and Pluchinsky (1992), Arquilla and Ronfeldt (2001),
Hoffman (1998), and Sandler (2003).
12. This equilibrium could make both players worse off than the equilibria of the chicken game if
B c > b 2C, both of which are negative by assumption.
190
Preempt
Preempt
US
Status quo
Deter
EU
Status quo
2 B c, 2 B c
c, 0
0, c
0,0
b C, c C
b C, C
Deter
c C, b
C, b C
b 2C , b 2C
Figure 3: Deterrence and Threshold Preemption Game, 2B > c > B and 2C > b > C
game wins out over those of the embedded preemption game. Thus, the persistence of
deterrence is again demonstrated.
DETERRENCE AND THRESHOLD PREEMPTION GAME
To further study the resilience of the mutual deterrence equilibrium, we now tie the
countries interests for preemption closer together by assuming a threshold preemption game in which benefits of B per preemption effort are only realized once there are
two preemptors. This suggests that a sufficient effort must be expended or else nothing
is achieved. Thus, a token operation such as the U.S. retaliatory raid on Libya in April
1986 may have no lasting impactan outcome later demonstrated by empirical analysis (Enders and Sandler 1993). In Figure 3, two payoffs change in the northwest 2 2
matrix as compared with Figure 2a sole preemptor only incurs costs of c, and there
are no free-rider benefits. This embedded preemption matrix is an assurance or stag
hunt game in which players will match actions at the Nash equilibria: either both preempt or both maintain the status quo. Strategy choices must be coordinated. The 2 2
embedded deterrence game remains unchanged.
For the 3 3 game, we must also alter the payoffs associated with (Deter, Preempt)
and (Preempt, Deter) in Figure 3. If the United States deters and the EU preempts, then
the United States gains b C, and the EU endures the public costs of U.S. deterrence
and the private costs of its own preemption. The EU receives no benefits from its preemption because the threshold has not been attained. In the upper right-hand cell of the
matrix, the roles and payoffs are reversed. Deter still dominates over the status quo but
may not dominate over preempt. The strategic combination (Deter, Deter) remains a
Nash equilibrium. If 2B c b C, then (Preempt, Preempt) is a second Nash equilibrium. This inequality requires that mutual preemption provides payoffs at least as large
as those from deterring alone. It also implies that the sum of public benefits and costs
of preemption and deterrence, 2B + C, exceeds the corresponding sum of private
benefits and costs, b + c. If we use the benefits and costs underlying Figure 1, we get
Preempt
Preempt
US
Status quo
Deter
3B c , 2 B c
B, B c
B + b C, B c C
EU
Status quo
2B c, B
0,0
b C, C
191
Deter
2B c C, B + b C
C, b C
b 2C , b 2C
Figure 4: Asymmetric Deterrence-Preemption Game, 2B > c > B and 2C > b > C

2B c = 2 = b C, so that deter weakly dominates preempt, and the likely equilibrium

is (Deter, Deter), which is Pareto inferior to (Preempt, Preempt). Unless payoffs really
favor preemption, mutual deterrence is anticipated.
ASYMMETRIC PREEMPTION
Countries that have engaged in preemption have one major commonality: they have
attracted the lions share of terrorist attacks. Thus, Israel is known for attacking terrorist groups and their infrastructure in the hopes of weakening them. Since 9/11, the
United States has also greatly increased its preemptive actions against terrorists. U.S.
action is understandable given that approximately 40% of transnational terrorist
attacks are directed at U.S. people and property (Sandler 2003, Table 1). For domestic
terrorism, countries engage in preemption because limiting such attacks solely benefits them. For transnational terrorism on home soil, governments have been more
aggressive at pursuing groups that pose a significant threat to domestic interests (e.g.,
Red Brigades in Italy, Direct Action in France, and Red Army Faction in West Germany) and have done little to crush groups with little risk to domestic concerns (e.g.,
November 17 in Greece).
To model asymmetric gains from preemption, we alter the baseline game so that the
United States receives greater benefits from its own preemption than it confers on the
EU. In particular, U.S. preemption yields a benefit of 2B to itself and a spillover benefit
of B to the EU at a cost of c to the United States. EU preemption still provides a public
benefit of B at a preemption cost of c. Deterrence remains as before: each deterrer
receives private benefits of b and confers a public cost of C to both countries. We again
assume the same two sets of inequalities indicated in the caption to Figure 4.
In Figure 4, the 2 2 deterrence PD game has the same payoffs as in the baseline
game of Figure 2. If the United States preempts alone, it now receives 2B c while still
conferring a free-rider benefit of B on the EU. Compared with the baseline game, the
asymmetry adds B to each of the U.S. payoffs in the top rowall other payoffs remain
unchanged. The EU still has a dominant strategy to deter, so that the only possible
192
Nash equilibria must be (Preempt, Deter) or (Deter, Deter) in the right-hand column.
The former is the equilibrium if 2B c > b C, so that the United States gains more
from preempting alone than from deterring alone. In fact, satisfaction of this inequality makes preempt the dominant strategy for the United States. After 9/11, this
inequality likely held for a preferred-target country such as the United States since
deterring alone merely transfers the attack abroad where its people and property are
still attacked, thus greatly limiting U.S. gains from relying on deterrence alone. Target
asymmetry can explain the current state of affairs with the United States using preemption and deterrence, while less-preferred targets engage in just deterrence. As terrorists display less bias for a single target, there is less apt to be a preemptive response. It
is asymmetric targeting by terrorists that induces countries to resort to preemption.
The relevant asymmetry involves whose assets are targeted and not where they are targetedan attack against Israelis in Kenya will be viewed by the Israeli government as
an attack against Israel.
DOING BOTH
Next, we allow for a fourth strategic choice of doing both preemption and deterrence. The payoffs for preempting and deterring are those of the baseline game. The
relevant 4 4 game matrix is displayed in Figure 5, in which the northwest boldbordered 3 3 matrix is that of the baseline game. There are four new payoff combinations. If, for example, a government does both policies unilaterally, then it receives B
c + b C and provides the other government with a net payoff of B C. When one government does both and the other just preempts, the first receives 2B c + b C, and the
preemptor gets 2B c C. The other two payoff combinations are computed similarly.
Deterrence dominates if it provides a player a higher payoff than doing both when
the other player does both, that is, B + b 2C 2B c + b 2C. This inequality reduces
to c B, which is clearly true for our example because c > B by assumption. The persistence of deterrence is again displayed. Thus we are led back to the realization of the
last section that asymmetric preemption benefits are often essential to stem this tendency. In short, preemption benefits must outweigh associated costs if targeted government such as the United States is to engage in both deterrence and preemption
against a terrorist threat. Only those countries experiencing a disproportionate number
of attacks may fall into this category. All others will rely on deterrence and hope that
some prime target will privilege them to some purely public preemption benefits.
OTHER PROACTIVE AND
DEFENSIVE COUNTERTERRORIST POLICIES
Thus far, we have shown that for the choice between preemption and deterrence,
there is a marked tendency to rely on Pareto-inferior deterrence. Preemption abides by
a variety of game formsPD, chicken, assurance (threshold), asymmetric domi-
Preempt
Both
B c, B
B c C, B + b C
2B c C , 2B c + b C
B, B c
0, 0
C, b C
B C, B c + b C
Deter
B + b C, B c C
b C, C
b 2C , b 2C
B + b 2C , B c + b 2C
Both
2B c + b C , 2B c C
B c + b C, B C
B c + b 2C , B + b 2C
2 B c + b 2C , 2 B c + b 2C
Status quo
2 B c, 2 B c
EU
Deter
Preempt
Status quo
US
Figure 5: Four-Strategy Deterrence-Preemption Game, 2B > c > B and 2C > b > C

193
194
nance, and others indicated belowwhile deterrence typically adheres to a PD game.

The issue here is whether these tendencies also characterize other proactive and defensive counterterrorism policies.
PROACTIVE POLICIES
In Figure 6, we display the game-theoretic aspects of four additional proactive policies. Each two-player, normal-form game is in ordinal (rank-ordered) form, where the
largest number (i.e., 4) in the cells is the best payoff, and the smallest (i.e., 1) is the
worst payoff. Consider two governments contemplating freezing terrorist assets,
shown in panel a. Each government has two choices: to freeze assets or not to freeze
assets. If a weakest-link situation (Hirshleifer 1983) applies, then nothing is accomplished unless both players take actionsole action merely induces the terrorists to
put assets in the other country. The best payoff for each government arises when both
freeze assets, thus eliminating a safe haven for the terrorist assets. The worst payoff is
received by the government that freezes assets unilaterally since it suffers an economic
loss without any safety gain. The government that does nothing then gets the secondgreatest ordinal payoff of 3 from the banking profits derived from doing business with
the terrorists. This latter government does not get a free ride because no safety is
achievedthe lowest level of action determines the safety of everyone in a weakestlink scenario. The second-lowest payoffs are associated with mutual inaction. There
are then two Nash equilibriamutual freeze and mutual inactionindicated by the
cells with boldfaced payoffs. With a weakest-link situation, leadership by one country
can coordinate efforts. If, therefore, the United States freezes assets, the EU is better
off matching U.S. resolve because the EU prefers a payoff of 4 over 3.
When the noncooperating country is not worried about terrorist attacks and can
gain greatly by sequestrating terrorist funds, then its ordinal payoffs in the off-diagonal cells change from 3 to 4the temptation payoffand the mutual action payoffs
change from 4 to 3. A PD game results with a no-action equilibrium. Like preemption,
freezing assets can be associated with numerous game structures such as PD, chicken,
assurance, and asymmetric dominance. Asymmetric dominance applies when one
country confronts a greater terrorist threat and achieves some protection from unilateral action. Given the strategic similarity between preemption and freezing assets, a
country that must choose between freezing assets and deterrence will favor deterrence
unless there is a significant asymmetry or a weakest-link consideration motivates
cooperation.
Next, consider the proactive policy of retaliating against a state sponsor of terrorism. This policy has virtually the same strategic structure as preemption and is often a
PD game. It is a chicken game if mutual inaction results in a spate of terrorist attacks in
which the status quo is the worst outcome. In panel b of Figure 6, we characterize the
United States as the prime target of a state sponsor, so that it has a dominant strategy to
retaliate (4 > 3 and 2 > 1), while the EU has a dominant strategy not to retaliate. When
both targets exercise their dominant strategy, the Nash equilibrium (whose payoffs are
boldfaced) results, with the United States retaliating unilaterally. Retaliation may also
abide by a threshold assurance game. Once again, a policy choice between retaliation
Freeze
Freeze
4,4
EU
Retaliate Does not
EU
Does not
1,3
US
Retaliate
4,3
2,4
Does not
3,1
1,2
US
Does not
3,1
2,2
b. Retaliation: asymmetric dominance
a. Freezing assets: weakest link
Gather
Gather
2,2
EU
Infiltrate Does not
EU
Does not
Infiltrate
4,3
2,2
3,4
Does not
4,3
1,1
US
US
Does not
3,4
1,1
c. Intelligence: hero
195
Figure 6: Some Alternative Proactive Policies and Their Ordinal Game Forms
d. Infiltration: leader
196
and deterrence is apt to favor deterrence. After 9/11, the U.S.-led attack against the
Taliban, who harbored al-Qaida, follows this pattern, with most European countries
responding by tightening security to deter attacks.
We now turn to two proactive policies that can be associated with a quite different
strategic structure than the proactive policies considered thus far. In the case of gathering intelligence, the ordinal-payoff matrix for a two-government scenario may correspond to panel c of Figure 6. Each government must decide whether to gather intelligence on a terrorist threat or group. The intelligence game gives the greatest advantage
to the government that gathers the information and the second-greatest payoff to the
free rider. The gatherer achieves some additional benefit from being in control of the
information that is not obtained by the free rider. In a world of globalized terror, the
informed government will want to share much of its intelligence to protect its countrys citizens and assets abroad. If both governments gather the same intelligence,
there is wasted effort, and each may jeopardize the others covert operation. Thus
mutual action may result in the second-lowest payoff. Finally, mutual inaction leaves
both governments vulnerable, and this gives the lowest payoff. In panel c, the resulting
equilibria are the two off-diagonal cells in which just one country gathers the intelligence. This game structure is known as hero (Coleman 1999) because the player
who unilaterally moves away from the maximin solution of mutual gathering is a hero
by taking a lower return while conferring a higher return on the other player. Hero is a
coordination game in which players must coordinate their choices or else be saddled
with undesirable outcomes. This coordination requires a loss in autonomy that nations
have often been unwilling to display on security matters except in the direst of
circumstances. Furthermore, there is no room for two heroes as two heroes result in the
smallest payoffs.
If payoffs from intelligence are asymmetric because terrorists targeting decisions
focus on some governments, then an asymmetric-dominance scenario may arise. In
this case, the coordination dilemma is solved by the likely target providing intelligence
for itself and others. Ironically, the terrorists can greatly assist governments in addressing the coordination dilemma by having favorite targets that attract a disproportionate
share of attacks. As for other proactive policies, asymmetries may be essential if governments are to engage in intelligence gathering and deterrence and not rely on deterrence. Another asymmetry may arise from capacity when one country is better
equipped than the other for the mission. The latter may then be willing to let its counterpart gather the intelligence. For choices involving intelligence and deterrence, the
relatively high payoffs for both players mean that intelligence may win out when a
decision between them must be made. In situations where doing both is an option, one
or more players may do both, which again brings up a coordination problem.
In panel d of Figure 6, strategic aspects of infiltrating a terrorist group are indicated
in a 2 2 game representation. Taking the action outweighs the costs but not relative to
the net gain of free riding, which is associated with the greatest ordinal payoff. The
second-smallest payoff arises when both governments infiltrate a terrorist group
because mutual action may jeopardize the other governments operation. Agents may
be killed if governments do not know of their counterparts action. Moreover,
resources are wasted since nothing is gained from duplicating the mission. The small-
197
est payoffs arise from mutual inaction. The game is known as leader, in which the
player who moves away from the maximin solution of mutual action receives the
greatest gain (Coleman 1999). The two Nash equilibria are again the off-diagonal cells
with the boldfaced payoffs, in which one government infiltrates and the other free
rides. As in the case of hero, coordination is required or else low-paying diagonal cells
will be reached. The coordination can be provided de facto if one target has insufficient
capacity or expertise to provide infiltration. Coordination is also not an issue when one
country perceives a much greater threat from the group, so that an asymmetric dominance applies as in panel b. If infiltration abides by a leader game, then extending the
analysis to allow infiltration to be chosen along with deterrence may lead to equilibria
with both being chosen, as in the case of intelligence.
A final proactive policy concerns the development of new counterterrorism technologies (e.g., bomb-sniffing devices, plastic explosive tags, and new databases).
Such actions are best-shot public goods for which the greatest effort determines the
provision level (Hirshleifer 1983). Suppose that each of two governments can discover
the new technology. Further suppose that the technology gives 6 in benefits to everyone once discovered but provides no additional benefits for a redundant discovery. The
cost of discovery is, say, 4. If one computes the cardinal payoffs, they are (2, 6) and (6,
2) in the off-diagonal cells and (2, 2) and (0, 0) along the main diagonal. The greatest
payoff is gained by the free-riding government when the other government achieves
the technological breakthrough. In ordinal form, the game is that of panel c in Figure 6,
provided that the 4s are changed to 2s. The Nash equilibria are the off-diagonal cells in
which only one government acts; coordination is required to avoid duplication, not
unlike intelligence or group infiltration.
A number of findings are associated with proactive policies. First, most proactive
policies are purely public goods. If governments proactive policies are cumulative
(i.e., actions add to the total level achieved rather than weakest link, threshold, or best
shot), then a PD game applies, and inaction is the dominant strategy. Second, a variety
of game forms can characterize the same proactive policy owing to alternative ways
that effort levels of the governments are aggregated. Third, coordination games figure
prominently, meaning that some communication and joint efforts are necessary to
avoid wasteful duplication. Fourth, asymmetric targeting by terrorists can motivate
action by a government to privilege the rest of the governments with benefits from its
response.
DEFENSIVE POLICIES
Defensive policies include deterrence in which a PD game applies and the dominant strategy is to deter. Deterrence can result in a deterrence race whereby action by
one potential target induces another target to take similar steps to reduce the terrorists
likelihood of success or their payoffs. A race occurs because failure to act makes a government a soft target that will draw an attack. Another defensive policy is to harden a
target (e.g., fortifying embassies and diplomatic missions). Such security upgrades
again deflect an attack to other less fortified targets, thereby inducing potential targets
to compete in terms of fortification. Once again, a PD game applies. Both deterrence
198

TABLE 1
Policy Choices and Underlying Games

Policy Type
Proactive policies
Preemption
Freezing assets
Retaliation
Group infiltration
Intelligence
New technological barriers
Defensive policies
Deterrence
Hardening targets
Shoring up weakest link
Alternative Game Forms
Prisoners dilemma, chicken, assurance (threshold), coordination

(best shot), asymmetric dominance
Prisoners dilemma, chicken, asymmetric dominance, assurance
(weakest link)
Prisoners dilemma, chicken, assurance (threshold), coordination
(best shot), asymmetric dominance
Leader, asymmetric dominance
Hero, asymmetric dominance
Coordination (best shot)
Prisoners dilemma (deterrence race)
Prisoners dilemma (fortification race)
Prisoners dilemma, chicken, asymmetric dominance
and security enhancement are instances of strategic complements whereby action

by one government encourages similar actions by another government.
A somewhat different defensive scenario characterizes efforts to shore up a weakest-link or vulnerable country. Countries have an interest in bolstering such countries
defensive measures because foreign residents are in harms way as terrorists use soft
venues to hit other countries assets. Thus, one of the four pillars of U.S. counterterrorism policy is to offer assistance to countries whose capacity is inadequate to
counter terrorism (U.S. Department of State 2003). Shoring up vulnerable targets
abroad is a pure public good in which inaction is a dominant strategy unless a countrys
assets are the targets of choice. Thus, shoring up the weakest link gives rise to a PD
game, chicken game (if doing nothing is disastrous), or asymmetric dominance. In
contrast to the other two defensive actions, efforts to achieve an acceptable security
standard abroad yield purely public benefits. As such, this defensive policy has much
in common with proactive policies of preemption, freezing assets, and retaliating
against state sponsors.
CONCLUDING REMARKS
By way of summary, Table 1 lists six proactive and three defensive counterterrorism policies along with their corresponding game forms. Counterterrorism policies fall in four classes: PD scenarios with public benefits in which too little action follows, PD scenarios with public costs in which too much action follows, coordination
games (e.g., assurance, best shot, leader, and hero) in which bad outcomes must be
avoided, and asymmetric dominance in which a prime target provides protection for
all. When compared to defensive measures, proactive counterterrorist policies display
199
the greater variety of underlying game forms, which implies a richer set of policy
responses. Efforts to facilitate more appropriate responses must be tailored to the associated strategic structure (e.g., with asymmetric dominance, no policy intervention
may be needed if the acting country responds sufficiently for all, while for a chicken
game, responses must be coordinated to avoid a disastrous outcome).
Earlier, we examined the choices between preemption and deterrence and demonstrated the resilience of deterrence even though the associated Nash equilibrium was
the worse of the two embedded PD games. When a proactive policy such as retaliation
is combined with a defensive policy such as hardening targets, the associated 3 3
game has target hardening being the dominant strategy, analogous to the preemptiondeterrence choice. For the pattern of benefits and costs examined here, defensive policies of deterrence and hardening targets generally dominate many proactive policies,
except for intelligence and infiltration. For the latter two policies, equilibria involve a
coordination of efforts to avoid wasteful duplication or nations working at cross purposes. This coordination requires better communications between intelligence organizations or some type of signaling mechanism to indicate whose turn it is to act.
Many proactive policies yield purely public benefits in which free riding is a problem. In contrast, most defensive policies give private benefits and public costs, with
countries competing to match one anothers actions to not draw the attack. Governments are predisposed to engage in too little proactive effort and too much defensive
effortthus the general prevalence of the latter. Proactive policies are encouraged
primarily by asymmetric targeting, in which a few nations draw a larger share of
the attacks. This asymmetry raises these countries net benefits from proactive
measures that can potentially reduce the terrorist threat for everyone. Thus, asymmetric targeting works against terrorists interests. When asymmetries are sufficiently
great, a nation will engage in both proactive and defensive actions. A more optimal
response may ensue if the international community fosters the prime targets proactive
responses through subsidies or other support. Too much reliance on a prime target may
lead to either fatigue or the pursuit of an agenda not in keeping with other countries
interest; thus, free riding has its own costs.
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Public Choice (2005) 124: 7593

DOI: 10.1007/s11127-005-4747-y
Springer 2005
Collective versus unilateral responses to terrorism

TODD SANDLER
School of International Relations, University of Southern California, Von Kleinsmid Center 330, Los
Angeles, CA 90089-0043, USA (E-mail: tsandler@usc.edu)
Accepted March 2005

Abstract. Global terrorism presents collective action issues for targeted nations. Proactive
measures (e.g., preemptive strikes) against terrorists create external benets for all at-risk
nations. In contrast, defensive actions deect attacks to softer targets, thereby giving rise to
external benets to protected foreign residents and external costs to venues abroad. Coordinated
antiterrorism measures are particularly difcult to achieve when many nations must participate
and nonparticipants can undo the efforts of others. Thus, freezing terrorists assets or abiding
by a no-negotiation pledge pose difcult collective action problems. These same concerns do
not plague decisive action against domestic terrorism.
1. Introduction
Terrorism is the premeditated use or threat of use of violence by individuals
or subnational groups to obtain a political or social objective through intimidation of a large audience beyond that of the immediate victims. Terrorists try
to circumvent the normal political process through violence perpetrated on
a public who may then pressure the government to concede to the terrorists
demands. On 11 September 2001 (henceforth, 9/11), the four hijacked planes
graphically illustrated the havoc and destruction that terrorists can wreak on
society. If a targeted government views its future (discounted) costs from a
sustained terrorist campaign as greater than that of conceding to terrorists
demands (including reputation costs), then a government may grant concessions (Lapan & Sandler, 1993). In the absence of caving in, governments must
institute antiterrorist measures.
The modern era of transnational terrorism began in 1968 with terrorists
traveling between countries and maintaining a presence in multiple countries
to achieve their greatest impact. A watershed transnational terrorist event was
the 22 July 1968 hijacking of an El A1 Boeing 707 en route from Rome to
Tel Aviv with 10 crew members and 38 passengers, including three hijackers identied with the Popular Front for the Liberation of Palestine (PFLP)
(Mickolus, 1980, pp. 9394). This event is noteworthy for a number of reasons.
First, there was clear evidence of state-sponsorship after the plane landed in
Algiers, because Algeria took advantage of the situation and held some of the
hostages until 1 September 1968 when a deal was nally struck.1 Second, the
incident forced the Israelis to negotiate directly with the Palestinian terrorists
76
(Hoffman, 1998, p. 68). Third, massive media coverage demonstrated to other
terrorists that such events could capture worldwide attention. Fourth, one of
the terrorists helped land the plane in Algiers; hence, 9/11 was not the rst
instance where a terrorist ew a hijacked airplane (Mickolus, 1980, p. 94).
Fifth, a ransom of $7.5 million was paid by the French to the hijackers and
16 Arab prisoners from the 1967 Arab-Israeli war were released by Israel.
The hijackers were own to a safe location with their ransom; two of the
hijackers subsequently were involved in hijackings in 1972 (Mickolus, 1980).
This incident clearly depicts the transnational externality (i.e., uncompensated interdependency involving multiple countries) that modern terrorism
can imply where, e.g., a grievance in the Middle East affects a ight leaving
a European airport. To protect against such events, airports must institute adequate security measures against the spillover of terrorism from abroad. The
news coverage resulted in an externality in the form of additional hijackings.
Moreover, paid ransoms encouraged further incidents worldwide owing to the
promise of high rewards.
More recently, the skyjackings of 9/11 created transnational externalities
because the deaths and property losses at the World Trade Center (WTC) involved upwards of 80 countries. Subsequent efforts to bolster security in the
United States and Europe appear to be shifting attacks to developing countries e.g., Indonesia, Morocco, Saudi Arabia, Kenya, Turkey and Malaysia
(Sandler, 2005). The devastation of 9/11 raised the bar in terms of the kind of
carnage that a future terrorist act must produce to capture similar news coverage. That, in turn, induces the terrorists to innovate in order to nd new means
to cause even greater destruction. This innovation process is an intertemporal
externality that todays terrorists impose on tomorrows victims.
Modern-day transnational terrorism raises some essential dilemmas. Terrorists appear able to address their collective action concerns through cooperation among themselves, while governments are less adept at collective responses and primarily resort to unilateral (suboptimal) responses. For
transnational terrorism, there is a propensity for nations to focus on defensive
rather than proactive countermeasures. Defensive actions may merely deect
attacks to less-protected venues, leading nations to work at cross-purposes
(Arce & Sandler, 2005; Sandler & Lapan, 1988; Sandler & Siqueira, 2003).
Moreover, there is a clear tendency for at-risk nations to rely on a prime-target
nation to carry the burden for direct action against the terrorists. In contrast,
governments appear properly motivated to strike the right balance between
defensive and proactive responses against domestic terrorism.
The primary purpose of this paper is to explain the collective action failures
that plague targeted countries in their efforts to respond to global terrorism. To
accomplish this task, I employ some simple game theory to examine alternative
antiterrorism responses to a common transnational terrorism threat. Three
game forms are prevalent: prisoners dilemma, asymmetric dominance and
77
stag hunt. The last is particularly germane for analyzing cases where a degree
of coordination is required to accomplish some gain. For example, countries
that do not freeze terrorists assets can greatly undo the actions of those that do.
I address the asymmetries between governments and terrorists that underlie
many collective action concerns, driven by opposing externalities relevant to
todays networked terrorists who harbor common grievances. Terrorists own
actions may foster efforts for nations to address collective action concerns.
As the severity of attacks escalates, nations become more willing to follow
the lead of prime-target nations to take actions such as freezing terrorists
assets. I also underscore some of the public choice dilemmas where political
freedoms provide a favorable environment that some terrorists may exploit.
2. Preliminaries
At the outset, domestic terrorism must be distinguished from transnational terrorism. The former is solely a host country affair where its citizens resort to
terrorist attacks on other citizens or their property with the intention of furthering a domestic political or social agenda through violence and intimidation.
The bombing of the Alfred P. Murrah Federal Building in Oklahoma City
on 19 April 1995 was a domestic terrorist event, because Timothy McVeigh
and his accomplices were American citizens, as were the victims of the blast.
Moreover, this bombing did not have ramications for other countries.
By virtue of its victims, targets, institutions, supporters, terrorists demands, or perpetrators, transnational terrorism involves more than a single
country. The train bombings in Madrid on 11 March 2004 were transnational
terrorist incidents because many of the terrorists were foreign nationals who
came to Madrid to stage their attack. Moreover, the bombing victims included some non-Spanish citizens. In addition, the bombing had far-reaching
implications for other European countries that then had to take precautions
against similar attacks. The four hijackings on 9/11 also were transnational
terrorist acts with global consequences as to their victims, security concerns,
and nancial impact. Although domestic terrorism is far more prevalent than
transnational terrorism (National Memorial Institute for the Prevention of Terrorism, 2004), the latter generates cross-border externalities that are difcult
to address, and leads to collective action failures when unilateral responses by
governments work against global welfare. For example, US efforts to secure
its borders have transferred most terrorist incidents against US interests to
foreign venues. Although 40% of all transnational terrorist attacks are against
US people or property, few have occurred on US soil in recent years (Sandler,
2003). Transnational terrorism, as practiced by Al-Qaida and its loose network
of afliates, poses a greater threat than domestic terrorism to world security
as fundamentalist groups seek maximum carnage and nancial repercussions
(Hoffman, 1998).
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Counterterrorism consists of government actions to inhibit terrorist attacks
or curtail their consequences. There are two main categories of antiterrorism
policies proactive and defensive. Proactive or offensive measures target
the terrorists, their resources, or their supporters directly. By weakening the
ability of terrorists to operate, proactive policies reduce the frequency and
prevalence of attacks against all at-risk targets. Such actions include attacking terrorist camps, assassinating terrorist leaders, freezing terrorist assets,
retaliating against a state-sponsor, gathering intelligence, and inltrating a
terrorist group.
Defensive or passive policies try to protect a potential target against an
attack or to ameliorate the damage in case of an attack. Defensive measures
may involve the installation of technological barriers (e.g., bomb-snifng devices, metal detectors, or biometric identication), the hardening of targets
(e.g., barriers in front of federal buildings), the deployment of security personnel (e.g., sky marshals on commercial ights), and the institution of terrorist
alerts. While some proactive policies may provoke a terrorist backlash, defensive measures usually do not have this potential downside (Rosendorff &
Sandler, 2004). By reducing the terrorists probability of success and increasing their operations costs, defensive actions attempt to dissuade terrorists by
reducing their expected net benets from attacks. If, however, the authorities
make one type of attack harder without affecting the costliness of other types
of attacks, then such partial measures can merely induce terrorists to substitute
one mode of attack for another relatively cheaper one e.g., the installation
of metal detectors at airports reduced skyjackings but increased other types of
hostage-taking missions (Enders & Sandler, 1993, 1995, 2004; Enders et al.,
1990). Similarly, defensive actions that make one country more secure may
merely transfer attacks to less-secure venues abroad.
3. Asymmetries Between Nations and Terrorists
To appreciate the collective action problems posed by transnational terrorism,
one must recognize the asymmetries that distinguish the behavior of targeted
nations and their terrorist adversaries. These asymmetries provide tactical
advantages to terrorists who target assets from powerful nations.
Nations must guard everywhere, while terrorists can identify and attack
the softest targets. Efforts by nations to harden targets induce terrorists to
redirect their attacks to less-protected venues. As rich countries mobilized
their defensive measures following 9/11, the developing world stayed the
venue of choice from which to attack Western interests. In 2003, there were 190
transnational terrorist attacks, with none in North America and 24 incidents
in Europe.2 There were, however, 70 attacks in Asia, 53 in Latin America,
and 37 in the Middle East. Although there were no transnational attacks in
the United States in 2003, there were 82 anti-US attacks on foreign soil: 46,
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Latin America; one, Eurasia; two, Africa; six, Asia; 11, Middle East; and 16,
Western Europe. During 2002, there were 198 transnational terrorist incidents,
with none in North America and only nine in Western Europe. Asia was the
preferred venue with 101 attacks.
Nations are target-rich; terrorists are target-poor. Terrorists may hide in the
general population in urban centers, thereby maximizing collateral damage
during government raids to capture them. Nations have to be fortunate on a
daily basis, while terrorists only have to be fortunate occasionally.3 As such,
terrorists can sit back and pick the most opportune time to strike, as they did on
9/11. Unlike liberal democracies that are constrained in their reaction to terrorist threats, terrorists can be unrestrained in their brutality, as demonstrated
by attacks perpetrated by fundamentalist terrorists in recent years. Nations
are not well-informed about terrorists strength, whereas terrorists can easily
discover how many governmental resources are being allocated to antiterrorist
activities. In the United States, this information is a matter of public record.
This asymmetric information is amply illustrated by US estimates of al-Qaida
strength as several hundred to several thousand members, reported by the US
Department of State (2001, p. 68) just ve months before 9/11. The 7 October
2001 invasion of Afghanistan indicated that Al-Qaida had far more members
than the State Departments upper-bound estimate. Such misleading gures
not only hamper the military in terms of planning antiterrorist operations,
but they also make it more difcult to convince other countries to contribute
troops to preemptive raids on training camps and terrorist infrastructure.
Another asymmetry concerns the organizational structure adopted by governments and terrorists. Governments are hierarchical, whereas terrorist organizations are nonhierarchical with loosely tied networks of cells and afliated
terrorist groups (Arquilla & Ronfeldt, 2001). Terrorist cells and groups can
operate independently of one another. Moreover, captured terrorist leaders can
provide only limited intelligence owing to the looseness of the network and
the virtual autonomy of many of its components. Recent espionage scandals
indicate that government informants can do much damage to the integrity of
an intelligence organization.
Beyond some point, government size can limit its effectiveness in waging an antiterrorist campaign. Also, a larger government has more targets
to protect and can create greater grievances from taxes used to nance the
bureaucracy. In contrast, a larger terrorist group can engage in a more effective campaign that may signal to the government that an accommodation
is less costly. Hirshleifer (1991) introduced the notion of the paradox of
power in conict situations, where smaller forces may have a strategic advantage over larger, militarily superior forces. In particular, small insurgencies,
including terrorists, can cause more damage per operative insofar as some
technologies of conict favor the small force that can hide and strike large
targets.
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A nal asymmetry is the most essential for understanding why nations
have greater difculty in addressing their collective action problem than the
terrorists. National strength provides a false sense of security, thereby inhibiting governments from appreciating the need for coordinated action. Nations
also do not agree on which groups are terrorists e.g., until fairly recently,
the European Union (EU) did not view Hamas as a terrorist organization despite its suicide bombing campaign. In democracies, leaders interests in the
future are limited by the length of the election cycle and their likelihood of
reelection. Agreements made with leaders of other countries to combat terrorism may be rather short-lived if a government changes. For example, the
new Spanish Prime Minister Zapatero pulled the countrys troops out of Iraq
following his surprise win in the national elections stemming from the alleged link between the 11 March 2004 train bombing and Spanish support for
the US-led war on terror. This short-term viewpoint limits intergovernmental
cooperative arrangements that could follow from a repeated-game analysis,
based on a tit-for-tat strategy. Because many counterterrorism actions among
governments abide by a prisoners dilemma game structure (see Section 4), a
myopic viewpoint works against solving the problem through repeated interactions, unless agreements can have a permanency that transcends a change
in governments. The high value that governments place on their autonomy
over security matters also inhibits their addressing collective action issues
successfully.
A much different situation characterizes the terrorists who have cooperated in networks since the onset of modern-day terrorism. From the late
1960s, terrorist groups have shared personnel, intelligence, logistics, training
camps and resources (Alexander & Pluchinsky, 1992; Hoffman, 1998). More
recently, Al-Qaida forged a loosely linked network when Osama bin Laden began franchising other Islamic groups (Raufer, 2003; Hoffman, 2003). Despite
different political agendas, terrorist groups share similar opponents e.g., the
United States and Israel that provide some unity of purpose. For example,
the left-wing terrorists groups in Europe during the 1970s and 1980s were
united in their political orientation and their goal to overthrow a capitalistic
system (Alexander & Pluchinsky, 1992). Terrorist groups cooperate because
of their relative weakness compared with the well-armed governments that
they confront. Given their limited resources and grave risks, terrorists have
little choice but to cooperate to stretch resources. Terrorist leaders tend to be
tenured for life so that they view intergroup interactions as continual. This
long-term orientation means that terrorist groups can successfully address
prisoners dilemma interactions through punishment-based tit-for-tat strategies. The temptation to renege on an agreement with another terrorist group
for a short-term gain is tempered by the long-run losses from the lack of future
cooperative gains. Terrorists appear to place less weight than governments on
their autonomy, provided that shared actions further their goals. Unlike their
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government adversaries, terrorists are motivated to address their collective
action concerns.
4. Proactive Versus Defensive Policies

As a generic proactive policy, I examine efforts to preempt a terrorist group
by, say, attacking the terrorists bases and training camps. I then compare and
contrast preemption with a generic defensive policy i.e., actions to deter an
attack by fortifying vulnerable targets.
4.1. Preemption
In panel a of Figure 1, a symmetric preemption game is displayed for two
targeted countries (i.e., nations 1 and 2), each of which must decide whether or
not to launch a preemptive strike against a common terrorist or state-sponsor
threat. The attack is meant to weaken the terrorists and limit their future
actions. Given the common threat posed by the terrorists, each preempting
country provides a pure public benet of B for itself and the other at-risk
nation. More benets are achieved when both countries attack the terrorists,
as combined action does more harm to the terrorists.
In each cell of the 2 2 game matrix, the left-hand payoff is that of nation
1 and the right-hand payoff is that of nation 2. The cost of preemption is c
for each preemptor, where c > B. I assume that isolated action results in
less benets than costs so that a collective action problem occurs.4 If nation
Figure 1. Alternative preemption scenarios.
82
1 preempts alone and nation 2 maintains the status quo, then nation 1 nets
B c < 0, while nation 2 receives the free-rider benet of B. These payoffs
are interchanged when the nations roles are reversed in the bottom left-hand
cell. When both nations join forces, each nets 2B c from the two preemption
actions, where 2B is assumed to be greater than c. All-around inaction gives
payoffs of 0 to both nations. Given these assumptions, each nations dominant
strategy is to do nothing, because B > 2B c and 0 > B c. The underlying
game is a prisoners dilemma with a Nash equilibrium of mutual inaction. If
the symmetric case is extended to n nations with each preemptor providing B
in benets for all at-risk nations at a provision cost of c > B to the preemptor,
then the outcome is for no nation to act. A repeated-game version is not
promising owing to the short-run view that nations take of such interactions
with other governments.
A more optimistic case arises in the asymmetric version in panel b of
Figure 1, where benets and costs are tailored by subscripts to the two nations.
Nation 1 is a prime target of the terrorists with more to gain from any action
that weakens the terrorists. Suppose that nation 1 receives a benet of B1
from its own preemptive action or that of nation 2. Moreover, B1 exceeds
its preemption costs of c1 . Since B1 > c1 , nation 1s dominant strategy now
is to preempt, which is analogous to the United States after 9/11. Nation 2
is in an analogous situation to that in panel a; thus, 2B2 > c2 > B2 and
nation 2s dominant strategy is still to do nothing. As each nation exercises
its dominant strategy, the Nash equilibrium results in nation 1 preempting
unilaterally. The underlying game is one of asymmetric dominance. With
the United States sustaining 40% of transnational terrorist attacks worldwide,
its willingness to preempt alone or to lead a coalition is easy to understand. By
focusing so many attacks on US interests, the terrorists motivate US proactive
responses. If terrorists had not concentrated their campaign on a couple of
nations, there would be even fewer proactive measures against terrorism. The
Nash equilibrium in panel b is not necessarily the social optimum (based on the
compensation principle) insofar as the sum of benets from mutual preemption
may exceed that of the Nash equilibrium. Matrix b can be extended to n nations
with m prime targets and n m nonprime targets. As such, the subset of prime
targets is motivated to take aggressive actions against the terrorists.
Next suppose that some at-risk nation adopts proactive measures (even
symbolic ones) to support a prime-target nations actions, as Spain and Japan
did in the US war on terror. Their supportive efforts put their people in greater
jeopardy. In this scenario, nation 2s assumed inequality changes to c2 > 2B2
in panel b of Figure 1. Nation 2s dominant strategy is to do nothing as
illustrated by Spains withdrawal from Iraq following the 11 March 2004
train bombing where this inequality became apparent. Terrorists have a clear
motive to attack countries that bolster the proactive measures of prime-target
countries.
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Figure 2. Deterrence: Symmetric prisoners dilemma
4.2. Defensive measures

Next, I consider deterrence as a means to limit terrorists success by hardening
a target at an expense of C to the deterrer. In Figure 2, such action provides a
benet of b greater than C for the deterrer. Unlike preemption with its public
benets, defensive measures have a public cost of Ci because the attack may
be deected to country i as country j takes precautionary actions. If nation
1 deters alone, then it gains b C, while nation 2 suffers a cost of C2 as
it becomes a more desirable target. When nation 2 deters alone, the payoffs
are reversed with nation 1 sustaining a deection cost of C1 . No action
gives 0 payoffs, while mutual deterrence provides payoffs of b C Ci for
nation i, i = 1, 2. Since b > C, the dominant strategy in the game matrix
is for both countries to deter. As each nation plays its dominant strategy, the
Nash equilibrium of this prisoners dilemma is for everyone to deter, which
gives both nations a negative payoff based on the parameters assumed. The
payoffs for mutual deterrence include Ci because I implicitly assume only
two countries and that the terrorists are bent on attacking some target no
matter how well protected. Thus, matching deterrence upgrades leads to net
costs, so that C + Ci > b, as assumed. The deterrence game is analogous to
the problem of the commons, with all players trying to achieve a gain while
ignoring the external-cost consequences of their actions.
If this game is extended to n nations with analogous parameters, then the
suboptimality of the Nash equilibrium worsens as more nations take defensive measures to shift the attack elsewhere. In todays world of globalized
terrorism, the games outcome is that the terrorists will stage their attacks
in those nations with the least defensive measures the so-called soft targets. In these venues, the terrorists will hit the interests of those nations
against which they have the greatest grievances. Thus, the paucity of attacks
in North America and Europe in 20022003 is consistent with this prediction, as is the large percentage of attacks against US people and property
abroad.
Shoring up the softest target implies its own collective action problem.
Bolstering the defense of soft targets provides purely public benets to all
84
nations whose people or property are in jeopardy. In a globalized world, this
may involve improving many nations defensive capabilities. The underlying symmetric game for shoring up the softest target is surely a prisoners
dilemma with no action at the equilibrium. With nonsymmetric players, the
prime-target nations have the most to gain from increasing the capabilities of
soft targets. Thus, one of the four pillars of US counterterrorism policy is to
improve the antiterrorism abilities of those countries that seek assistance (US
Department of State, 2004). No country not even the United States has
the requisite resources to enhance all countries counterterrorism activities.
Since 9/11, the United States has been spending large amounts on its own
proactive and defensive responses, which limits its capacity to help others.
There is also a moral-hazard problem associated with strengthening another
countrys capabilities, since the latter may purposely use this money for domestic concerns and not protect the providing countrys interests. Thus, US
aid to country X might either be used to protect non-US targets in X or else
replace Xs usual security expenditures.
4.3. Choice between preemption and deterrence
Even though preemption implies public benets and private costs, while deterrence implies public costs and private benets, the prisoners dilemma applies
to both situations in their symmetric presentation. What would happen if a
nation has three strategic options: deter, status quo, and preempt? Arce and
Sandler (2005) examined this question and found that the deter strategy dominates in two-nation symmetric scenarios. Ironically, the mutual-deter Nash
equilibrium provides the smallest summed payoff in the associated 33 game
matrix. These authors vary the game form for the embedded preemption game
(e.g., chicken is allowed) but uncover a robustness of their results. Even when
a fourth policy choice deterring and preempting is included, the deter
choice dominates.
For domestic terrorism, nations are able to balance proactive and defensive
measures. Israel clearly applies both in its domestic struggle against Hamas
and Hezbollah. In their ght against leftist terrorists in the 1970s and 1980s,
countries in Europe used proactive and defensive campaigns. The former resulted in the capture of Direct Action in France, the Red Brigades in Italy,
and the Combatant Communist Cells in Belgium in the 1980s (Alexander
& Pluchinsky, 1992). Why do tactics to combat domestic terrorism generally differ from those used by non-prime-target nations to ght transnational
terrorism? First, the host nation is the only target of domestic terrorism. Defensive actions are not applied to transfer the attack abroad as in the case
of transnational terrorism. Any transference of domestic attacks takes place
among targets within the nation. A centralized government can internalize any
transference externality when deciding defensive allocations for the country.
85
There is no centralized supranational government to serve the same purpose for
transnational terrorism. Second, the benets of a proactive campaign against
domestic terrorism are private to the venue nation. As such, the nation cannot
free ride on any other nations efforts, since other nations are not in jeopardy. For domestic terrorism, the central government removes much of the
strategic maneuvering that characterizes policy decisions for transnational
terrorism.5 Third, defensive measures require protecting all potential targets,
while proactive responses only necessitate intelligence-based raids against
the terrorists or their resources. There is a cost-effectiveness in instituting a
focused proactive campaign; defensive action may lead to virtually limitless
spending.
5. Coordination Dilemma: Freezing of Terrorists Assets
Obviously, other game forms can apply to countermeasures in the war on terror. A common game form for some policy choices is a stag-hunt assurance
game, where both parties are best off if they take identical measures. When a
player takes the measure alone, this player receives the smallest payoff and the
player who does nothing earns the second-greatest payoff. This kind of scenario is descriptive of a host of counterterrorism policies where two or more
nations must act in unison for the best payoffs to result. Examples include
freezing terrorist assets, denying safe haven to terrorists, applying sanctions
to state-sponsors, or holding to a no-negotiation policy. Even one nation that
breaks ranks can ruin the policys effectiveness for all others. To illustrate
such scenarios, I use freezing terrorist assets as a generic example and begin
with a two-nation symmetric case.
Matrix a in the top of Figure 3 displays this scenario where the highest
payoff of F results from mutual action, followed by a payoff of A from doing
nothing either alone or together. The smallest payoff, B, comes from freezing
assets alone since the terrorists can merely transfer their assets elsewhere,
leaving the acting country with some banking losses but few safety gains. Since
F > A > B, there is no dominant strategy. There are, however, two purestrategy Nash equilibriums: both countries freeze assets or neither freezes
assets.
A third Nash equilibrium involves mixed strategies in which each pure
strategy is played in a probabilistic fashion. To identify this mixed-strategy
equilibrium, I determine the probability q of nation 2 freezing terrorist assets that make nation 1 indifferent between freezing terrorist assets and doing
nothing. Similarly, I derive the probability p of action on the part of nation
1 that makes nation 2 indifferent between the two strategies. Once p and q
are identied, equilibrium probabilities for maintaining the status quo simply
equal 1 q and 1 p for nations 2 and 1, respectively. The relevant probabilities are indicated for matrix a besides the respective column and row. The
86
Figure 3. Alternative freezing assets scenarios.
calculations for q (or p not shown) go as follows:

q F + (1 q)B = q A + (1 q)A,
(1)
from which we have

q = (A B)/(F B).
(2)
when q exceeds this value, cooperation in the form of both countries freezing
terrorist assets is the best strategic choice. An identical expression holds for
p owing to symmetry. The ratio in (2) represents the adherence probability
that each nation requires of the other to want to coordinate its freeze policy.6
A smaller equilibrium probability favors successful coordination, because a
nation requires less certainty of its counterparts intention to freeze assets in
order to reciprocate.
From Equation (2), either a larger gain (F) from a mutual freeze or a smaller
status-quo payoff (A) promotes the coordination equilibrium by reducing the
required adherence probability. An event like 9/11 not only raises F but lowers A as nations realize the benets from limiting terrorists resources and the
catastrophic consequences that inaction may have for all. As terrorists escalate
the carnage to capture the medias attention, nations are increasingly drawn
to coordinate counterterrorism activities when unied action is required. Following 9/11s unprecedented casualties, many more nations participated in
87
freezing assets,7 but participation is by no means universal. Differentiating
the right-hand side of (2) with respect to B shows that a decrease in the payoff
associated with unilaterally freezing assets inhibits cooperation by raising p
or q.8
This game scenario can be readily generalized to n homogeneous nations,
where at least n nations must freeze assets if each participant is to receive a
payoff of F. For less than n freeze participants, each adherent receives B for
cooperating and the nonadherents get A. If nations are uncertain about the
intentions of other nations, then freezing assets is a desired policy provided
that a nation believes that the n 1 required additional participants will follow through with a collective probability greater than q. This then implies
that each nation must be expected to cooperate by at least the n 1st root of
q, which for even modest groups may require near certainty. This is not an
encouraging nding. If, however, the required number of adherents for coordination gains can be limited, then this decreases the assurance probabilities.
For an agreement to freeze assets, this is best accomplished by rst unifying
some of the major nancial-center nations i.e., the United States, the United
Kingdom, Switzerland, Japan and Germany. A concern with this strategy is
that some near-catastrophic terrorist acts are not very costly e.g., the 1993
WTC bomb cost just $400 and caused $500 million in damages (Hoffman,
1998) so that near-universal freezes may be required.
In matrix b in Figure 3, an alternative scenario is displayed where not
freezing assets, when the other nation freezes, gives the second highest payoff
to the noncooperator, so that F > E > A > B. This scenario implies that the
nation that does not join the freeze can prot by providing a safe haven for
terrorists funds. The nation may be motivated to do so if it does not view its
own people or property as likely targets of the terrorists. The two pure-strategy
Nash equilibriums are for a mutual freeze or no action along the diagonal of the
matrix. For the mixed-strategy Nash equilibrium, the adherence probabilities
are now:
p = q = (A B)/[F B + (A E)],
(3)
which are greater than those in (2), because (A E) < 0. Hence, coordinating
a freeze becomes more difcult owing to protable opportunities available
to less scrupulous nations that can greatly limit gains from action to freeze
assets, eliminate safe havens, or abide by no-negotiation pledges (see, e.g.,
Lee, 1988).
Policies that penalize noncompliance can reverse the ranking of A and E,
so that A > E. As a consequence, adherence becomes easier to achieve. There
are two practical problems: (i) to identify nations that accept terrorists funds
and (ii) to convince nations to punish nonadherents. Since nations hide their
88
bad behavior, singling out nations for punishment is not so easy. Imposing
sanctions is itself a prisoners dilemma game that presents its own collective
action concern.
In Figure 4, a nal freeze scenario allows for asymmetry where nation 2
has more potential nonadherence prots but fewer gains from acting alone
than its counterpart. That is, I assume that F > E i > A > Bi , i = 1,
2, where E 2 > E 1 and B1 > B2 . The pure-strategy Nash equilibriums
are still the matching-behavior outcomes along the diagonal of the matrix
in Figure 4. For the mixed-strategy equilibrium, the adherence probabilities
are:
p=
A B2
A B1
>
= q.
F B2 + (A E 2 )
F B1 + (A E 1 )
(4)
To act, nation 2 needs greater assurance than nation 1 that the other nation
will freeze assets. Such asymmetry is likely to work against consummating a
freeze.
When coordination is required for a counterterrorism measure, many factors work against getting sufcient action. A crucial consideration is the minimum number of nations required for coordinating antiterrorism activities.
As this minimum increases, nations must have greater assurance that others
will cooperate for them to follow suit. Any policy action that limits this minimum bolsters cooperation. As the threat of terrorism escalates, coordination
of counterterrorism is encouraged because cooperative outcomes have greater
payoffs and unilateral action has smaller payoffs. The application of technology to track money ows can identify duplicitous nations that hamper other
nations actions by providing safe havens to terrorists assets. Retribution
against these spoiler nations can foster more fruitful coordination by sending a clear signal that proting from terrorism has consequences. Efforts by
the International Monetary Fund and World Bank to assist countries in tracking asset transfers can lower the costs of unilateral action, thereby boosting
efforts to freeze terrorists assets.
Figure 4. Asymmetric freezing assets scenario.
89
6. Public Choice Dilemma
The recent terrorism literature has shown that there appears to be a positive
association between terrorism and democracy (Eubank & Weinberg, 1994,
2001; Li & Schuab, 2004; Schmid, 1992). This association is traced to factors
in a liberal democracy that can provide a favorable environment for transnational terrorist activities. For example, freedom of the press allows terrorists
to publicize their cause through news coverage of terrorist attacks. Media coverage of ghastly events also serves terrorists needs to create an atmosphere
of fear where everyone feels at risk. File footage is reshown periodically on
anniversaries of events and when related incidents occur, so that these events
remain in the public consciousness. Restraints on governments powers limit
the ability of authorities to hold terrorist suspects or to gather intelligence.
Obviously, 9/11 has eroded some of these restraints as civil society became
more willing to trade away some civil liberties for greater security. Freedom
of association also provides an environment conducive to terrorism. Modern
democratic states are not only target-rich, but also present opportunities for
funding and military training. Information is also readily available on building
bombs and guerrilla tactics in an open society. In contrast, an autocracy is a
less supportive environment for terrorism. If a terrorist group in an autocracy
wants to publicize its cause, then it may stage incidents in democracies where
news coverage is more complete and the environment is more supportive.
Crossing borders is generally easier in a liberal democracy than in an autocracy which, in turn, encourages the export of terrorism and the prevalence of
transnational externalities.
This association between democracy and transnational terrorism presents
a real public choice dilemma. Usually, democratic ideals work in a countrys favor e.g., democratic countries do not tend to go to war with one
another. There are a number of research issues that require further empirical analysis to understand the public choice implications of transnational
terrorism. First, the staging of terrorist events in liberal democracies requires
study. To date, there has been no careful and convincing study on whether
transnational terrorism is originating in or spilling over to democratic countries. The level of this alleged externality needs to be investigated in order
to determine the appropriate policy response. For example, enhanced border
security can address some spillover terrorism. Second, the inuence of the
type of democracy on the level of terrorism requires analysis. Which kind of
democratic system proportional representation or majoritarian system is
more conducive to terrorism? Since proportional representation gives more
views, even extreme ones, a presence in government, terrorism may be less
prevalent under proportional representation than under a majoritarian system.
The impact of the type of democratic system on the level of terrorism has not
been investigated.9 Third, the role of rent seeking as a motive for terrorism
90
requires further analysis. A paper by Kirk (1983) argued that government size
encourages more terrorism because of greater potential rents to capture. His
analysis probably does not apply in todays world where fundamentalist-based
terrorism is the driving force, since these terrorists goals do not appear to
be distribution driven. Many fundamentalist groups e.g., Al-Qaida view
all nonbelievers as enemies and want an Islamic state (White, 2003). In those
countries where there are rival terrorist groups, a rent-seeking explanation of
terrorism may be appropriate. Each terrorist group is in a contest with other
groups for the provision of a public good in the form of a political change
that favors the groups constituency. Rent-seeking costs are the expense of the
terrorist campaign that promotes the terrorists demands. Such costs represent
a lower bound on the expense that the campaign imposes on society, because
damage to the latter must also be included.
7. Concluding Remarks
The paper applies elementary noncooperative game theory to explore the collective action dilemmas that confront nations as they address a global terrorist
threat. Although incentives are conducive for terrorists to form networks and
cooperate, incentives are less supportive for targeted nations to coordinate
their counterterrorism policies. Both proactive and defensive measures often
imply an underlying prisoners dilemma game in which insufcient action
characterizes offensive efforts and too much action characterizes defensive
responses. For proactive measures, a prime-target country is anticipated to
act. By concentrating their attacks on a couple of target countries, terrorists
motivate these countries to strike back and privilege all at-risk countries with
their actions to weaken the terrorists. If countries realize that defensive measures may merely divert attacks abroad where their people and property are still
targeted, then there will be a smaller tendency to overspend on defensive measures. For domestic terrorism, there is a better balance struck between proactive and defensive responses because a central government can internalize the
externalities among targets that plague responses at the transnational level.
Collective action concerns may be particularly troublesome for counterterrorist actions requiring sufcient transnational coordination, where nonparticipating countries can severely undermine the efforts of the cooperators. Such
coordination concerns apply to efforts to freeze terrorists assets, eliminate terrorists safe havens, deny terrorists weapons, and maintain a no-negotiation
policy. As the number of participants required for cooperative gains to be
realized increases, the associated assurance probabilities also increase. Thus,
in the case of freezing terrorists assets, a few nations that safeguard these
assets can provide terrorists with the means to engage in some large-scale attacks. This is especially true because deadly events may be relatively cheap to
nance. Sanctions for nonparticipants can improve coordination possibilities
91
but raise a collective action problem of their own, since sanctions provide
purely public benets. By targeting countries and their interests at home and
abroad, todays terrorists worsen the coordination problem for at-risk countries. As terrorists escalate the damage from their acts, they, however, increase
the likelihood of coordination success on the part of targeted countries. Following 9/11, many more countries started to freeze terrorists assets.
Acknowledgments
The author is the Robert R. and Katheryn A. Dockson Professor of International Relations and Economics. The authors research was nanced in part
from the Dockson endowment. While assuming full responsibility for any
shortcomings, the author has beneted from comments by Hirofumi Shimizu
and Kevin Siqueira on an earlier draft.
Notes
1. The Algerians immediately freed the 23 non-Israeli passengers. On 27 July 1968, they
released the Israeli women and children hostages (Mickolus, 1980, p. 94). The remaining
hostages were held at an Algiers military base under the protection of the Algerian
government.
2. The gures in this paragraph come from US Department of State (2004, pp. 176181).
3. This asymmetry paraphrases what Irish Republican Army (IRA) terrorists said in a letter
after they learned that their 12 October 1984 bombing of the Grand Hotel in Brighton had
narrowly missed killing Prime Minister Margaret Thatcher. Their letter said, Today, we
were unlucky. But remember we have only to be lucky once. You will have to be lucky
always. See Mickolus et al. (1989, vol. 2, p. 115).
4. If B > c, then the dominant strategy is for both nations to preempt a scenario that we
virtually never see for multiple countries.
5. Before 9/11, airlines tried to save money in their employment of security personnel. The
deployment of federally trained screeners removes this strategic option.
6. Another interpretation for mixing is that p and q denote the uncertain beliefs that the nations
have for the likelihood that the other country will act.
7. Since 9/11, $200 million of alleged terrorist assets have been frozen (White House, 2003).
8. dq/d B = dp/d B = (A F)/(F B)2 < 0, so that a smaller B is associated with greater
adherence probabilities.
9. Recently Reynal-Querol (2002) showed that the incidence of civil wars is lower with
proportional representation than with majoritarian systems. Her analysis can be applied to
the incidence of transnational terrorism.
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DISTRIBUTION OF TRANSNATIONAL TERRORISM AMONG COUNTRIES

BY INCOME CLASS AND GEOGRAPHY AFTER 9/11
by
Walter Enders
and
Todd Sandler
Authors Note: This research was partially supported by the United States Department of
Homeland Security through the Center for Risk and Economic Analysis of Terrorism Events
(CREATE), grant number EMW-2004-GR-0112. However, any opinions, findings, and
conclusions or recommendations are solely those of the authors and do not necessarily reflect the
views of the Department of Homeland Security. The authors have profited from the comments
of two anonymous reviewers. Walter Enders is the Bidgood Chair of Economics and Finance at
of International Relations and Economics at the University of Southern California. The data
used in this paper are posted at http://www.isanet.org/data_archive.htm.

Abstract
This article applies an autoregressive intervention model for the 1968-2003 period to identify
either income-based or geographical transference of transnational terrorist events in reaction to
the rise of fundamentalist terrorism, the end to the Cold War, and 9/11. Our time-series study
investigates the changing pattern of transnational terrorism for all incidents and only those
involving U.S. people and property. Contrary to expectation, there is no evidence of an incomebased post-9/11 transfer of attacks to low-income countries except for attacks with U.S.
casualties, but there is a significant transference to the Middle East and Asia where U.S. interests
are, at times, attacked. We also find that the rise of fundamentalist terrorism has most impacted
those regions the Middle East and Asia with the largest Islamic population. The end to the
Cold War brought a terrorism peace dividend that varies by income and geography among
countries. Based on the empirical findings, we draw policy recommendations regarding
defensive counterterrorism measures.

The terrorist hijackings of September 11, 2001, (henceforth, 9/11) and their fiery aftermath
changed the way that the global community views its major security threats. There is now a
realization that a terrorist incident can result in large-scale casualties, huge property losses, and
long-lasting ramifications. Prior to 9/11, no terrorist event had caused more than $2.9 billion in
damages (Wolgast, 2002)1 or killed over 500 people (Quillen, 2002). The incidents on 9/11
murdered almost 3,000 and caused over $80 billion in losses (Kunreuther and Michel-Kerjan,
2004). In terrorists future attempts to outdo past atrocities, there is real anxiety among
authorities on the magnitude of the next large-scale attack. The March 11, 2004, commuter train
bombings in Madrid (henceforth, 3/11) underscore the vulnerabilities of all countries to terrorist
attacks. As antiterrorism efforts are bolstered, governments are beginning to recognize that there
is no foolproof defense that can eliminate the terrorist threat. Post-9/11 actions to augment
security in wealthy nations may have unintended negative consequences by inducing terrorists to
stage their attacks in countries less able to afford widespread defensive measures. Thus, the new
emphasis on homeland security in the United States and throughout the European Union (EU)
may merely displace terrorist attacks to softer venues where people and property from primetarget countries are attacked abroad (Enders and Sandler, 1993, 1995; Sandler and Enders, 2004).
This transference of attacks may be income-based or geographically founded. When
transference is income based, attacks are anticipated to be displaced from high-income countries
(HICs) to low-income countries (LICs) as some HICs deploy enhanced security measures that
make attacks more difficult and costly for terrorists to accomplish. At a minimum, these
defenses imply that terrorists may be forced to choose targets of lower value in rich countries.
For example, current actions to secure the monuments, the U.S. Capitol building, the White
2
House, and other terrorist-prized targets mean that an attack in Washington DC would be
deflected to a lower-valued venue. If the transference is geographically based, then the
displacement may be from a rich region (e.g., Europe) to a poorer region (e.g., the Middle East
or Eurasia). A geographical shift may also be motivated by the ability of terrorists to blend in
and establish a support system, especially for religious fundamentalist terrorists. If terrorists
attack foreign interests nearer to home, then they do not have to cross borders that, in some
regions, are more safely guarded after 9/11. In the 1980s, there was a significant spillover of
Middle East terrorism throughout Europe e.g., there were 43 terrorist incidents of Middle
Eastern origin in Europe in 1987 (U.S. Department of State, 1988:16, 18). Given the increased
scrutiny attributed to Middle Easterners in Europe following 9/11, more incidents are anticipated
to be staged in the Middle East now.
After 9/11, casual empiricism gives an impression that terrorist events are being
displaced from rich to poor countries, perhaps in light of defensive measures in the former.
There have been many recent high-profile transnational terrorist attacks in low-income and
middle-income countries (MICs) e.g., in Morocco, Turkey, Indonesia, India, Malaysia, Kenya,
the Philippines, Pakistan, and Afghanistan. Casual empiricism may not, however, withstand
careful statistical scrutiny. The primary purpose of this paper is to empirically evaluate with
time-series methods (i.e., autoregressive intervention analysis) whether terrorists have shifted
their venue based on target countries income or regional location in reaction to the rise of
fundamentalist terrorism, the end to the Cold War, or 9/11. To accomplish this task, we partition
countries into income categories based on two alternative schemes. We also apply a standard
regional classification to pigeonhole countries geographically. Additionally, we analyze four
different time series of transnational terrorist events: all incidents, incidents with casualties,
incidents with a U.S. target, and casualty incidents with a U.S. target. A secondary purpose is to
3
draw policy conclusions from the empirical findings.
Our aim is not to establish that income or political systems (constraints) are explanatory
variables for transnational terrorism. Such variables are already related to transnational terrorism
in recent studies by Li and Schaub (2004), Li (2005), and others. Investigating the impact of
these economic and political variables on terrorism is appropriate for panel estimates where the
time period is sufficiently long to allow for their effect. We are, instead, concerned with the
changing venue patterns of terrorist attacks in response to shocks. Events following 9/11, such
as the invasion of Afghanistan and the ongoing war on terror, surely have motivated
grievances and attacks against the coalition of the willing. Moreover, upgrades in homeland
security may have changed terrorist venues.2
Among other things, we find that the rise of fundamentalist terrorism, starting in late
1979, concentrated the distribution of transnational terrorism over time in LICs and those regions
with a large Islamic population. At the time of 9/11, LICs had been experiencing the lions share
of transnational terrorism with relatively few incidents in HICs. After 9/11, there has been a
gradual escalation of attacks with some increase in incidents involving a U.S. target in countries
of all three income classes. These attacks have, however, not occurred on U.S. soil, so that U.S.
homeland security has secured America, but not necessarily Americans. We uncover no clear
evidence of a general transference of attacks from HICs to LICs following 9/11. This is due, in
part, to the low level of terrorism in HICs and the high level in LICs at the time of 9/11; thus,
even a small increase in HIC attacks will appear proportionately large. There is more convincing
evidence of a regional shift in the post-9/11 era with incidents being displaced from Europe and
Africa to the Middle East and Asia, especially when U.S. targets are involved.
Background and Theoretical Considerations
4
Terrorism is the premeditated use or threat of use of violence by individuals or subnational
groups to obtain a political or social objective through intimidation of a large audience beyond
that of the immediate victims. This standard definition rules out state terror, but does not
eliminate state-sponsored terrorism in which a country aids a terrorist group through logistical
support, training, a safe haven, financing, or other assistance (Mickolus, 1989). Terrorists
typically unleash their attacks against a general audience that does not directly make the
decisions that they want to affect. By making attacks appear to be random, terrorists intimidate a
wider audience and create a general anxiety in the targeted country. In response, the country
may expend huge amounts of resources to protect a wide range of vulnerabilities. As a society
becomes more aware of the terrorist threat, homeland security efforts may increase dramatically.
Terrorism falls into two categories: domestic and transnational. Domestic terrorism
involves only the host country so that the perpetrators, victims, financing, and logistical support
are all homegrown. More important, domestic incidents generate implications for just the host
country or its interests. In contrast, terrorist attacks that include perpetrators, victims, targets, or
interests from two or more countries constitute transnational terrorism. The 3/11 bombings are
transnational because they involved Moroccan terrorists on Spanish soil and killed or maimed
victims from a number of countries. The kidnappings of foreign workers in Iraq in 2004 are
transnational terrorist events intended to pressure foreign governments to pull out their troops,
workers, and diplomats. These acts are also meant to keep other governments from assisting the
U.S.-backed fledgling Iraqi government. Clearly, terrorist incidents whose ramifications
transcend the venue country are transnational.
We are particularly interested in investigating transnational terrorism before and after
9/11, insofar as this type of terrorism poses the greatest concern for the global community. At an
earlier time, we would have said that it presented the greatest security challenge to developed
5
countries, but with security upgrades in the United States and some other rich countries,
transnational terrorism is a potential exigency for all countries owing to attack transference. The
dispersed al-Qaida network of affiliated groups heightens the interest in transnational terrorism.
Actions by countries to implement defensive countermeasures are anticipated to influence the
distribution of transnational terrorist attacks across countries. Hence, our focus is solely on this
form of terrorism.
For our theoretical underpinnings, we rely on a choice-theoretic model of terrorist
behavior.3 A terrorist group or network chooses its target country or venue to maximize
expected benefits, U, subject to a resource constraint. In particular, the terrorist groups expected
benefits are derived from attacks against n alternative venues, denoted by Ti, i = 1,..., n, so that
U = U (T1 , T2 ,..., Tn ) . The terrorist group picks its target venues to

maximize U ( T1 , T2 ,..., Tn ) , subject to
C T = I,
i =1
i i
(1)
where Ci is the per-attack expected costs of targeting country i, Ti is the number of attacks in i,
and I is the resource constraint of the terrorist group. Each Ci is determined by the complexity of
the attack and the countermeasures taken by the authorities. The solution to this problem is to
satisfy
U1 C1 = U 2 C2 = ... = U n Cn ,
(2)
subject to the resource constraint, where U i is the terrorists expected marginal benefits
( U
Ti ) of attacking country i. This solution indicates that anything that lowers (raises) a
single venues expected costs makes that venue more (less) attractive for terrorists to attack
relative to other venues. If the terrorists perceive the marginal benefits from attacking target i
(i.e., Ui) to increase because of new grievances against country i, then, other things constant, this
6
development augments incidents directed at i.
Based on equation (2), when two potential target venues offer the same expected benefits
for the terrorists (i.e., Ui = Uj), then they will pick the venue with the smaller expected costs (i.e.,
the smaller Ci or Cj). Actions by the authorities to harden target i may merely displace the attack
to another country whose Cj is now seen as smaller. The war on terror primarily influences the
terrorists resource constraint by reducing I and making all attacks less likely, or by changing the
relative costliness of attacking particular venues. Heavy-handed countermeasures may raise the
terrorists anticipated expected benefits, thereby making the proactive country a prized target.
When the attack venues imply the same expected costs (adjusted for risks), the terrorists will
choose the location with the greater expected benefits. Because terrorists must trade off
expected benefits and expected costs when deciding attack locations, action by a country to
secure homeland targets may fail to displace the attack abroad if the terrorists sufficiently value
the benefits to offset the greater expected costs. This is an essential insight in understanding the
pattern of attacks under investigation, because it implies that even massive increases in homeland
security need not deter nor deflect an attack at home when the terrorists sufficiently prize a target
i.e., view Ui as sufficiently high. Clearly, al-Qaida would dearly love to execute another attack
on U.S. soil even if it does not rival 9/11. Given these trade-offs of costs and benefits, the
distribution of terrorist attacks based on wealth or enhanced security is ultimately an empirical
question, dependent upon the terrorists perceived benefits and costs. Thus, redoubled efforts by
some rich countries to appear impregnable may merely increase the expected benefits of the
terrorists so that attacks may still occur in fortified countries. In contrast, support networks in
the terrorists home regions may reduce expected costs (Ci) enough or increase I sufficiently so
that some attacks hit foreign targets closer to the home of the terrorists following security
upgrades in the United States and elsewhere.
7
There are two significant developments prior to 9/11 that have influenced the pattern of
transnational terrorism and that must be taken into account in our post-9/11 investigation. The
first is the rise in fundamentalist-based terrorism. Hoffman (1998) places this rise at the fourth
quarter of 1979 (i.e., 1979:4) owing to the November 4, 1979, takeover of the U.S. embassy in
Tehran and the December 25, 1979, Soviet invasion of Afghanistan. Since 1980, the number of
religious-based terrorist groups has increased as a proportion of active terrorist groups: 2 of 64
in 1980; 11 of 48 in 1992; 16 of 49 in 1994; and 25 of 58 in 1995 (Hoffman, 1997:3). The
proportion of incidents with deaths or injuries increased by 17 percentage points after the onset
of fundamentalist terrorism (Enders and Sandler, 2000). Unlike the left-wing terrorists who were
the dominant influence until the 1990s, fundamentalist terrorists have resorted to suicide
missions, which are on average over thirteen times more deadly than other terrorist attacks (Pape,
2003).4 The rise of fundamentalist terrorism is anticipated to increase incidents with casualties
after 1979:4. This increase is anticipated to be unevenly distributed among countries, with the
greatest impact on LICs, where fundamentalist terrorists have greater support networks. When
geographical considerations are also taken into account, we expect that fundamentalist terrorism
will impact those regions i.e., the Middle East, Eurasia, and Asia with large Moslem
populations, since the marginal costs of terrorism there will be relatively less and resources more
plentiful.
The second pre-9/11 development is the end of the Cold War during the last quarter of
1991 with the demise of the Soviet Union and communist regimes in Eastern Europe. Their
demise removed some of the avid state-sponsors of terrorism (Wilkinson, 1992), because these
countries no longer had a reason to destabilize Western countries. This reduction in support
limits terrorist resources and, therefore, the number of attacks. In the late 1980s and early 1990s,
a number of European countries (e.g., France, Belgium, Germany, Spain, and the United
8
Kingdom) captured and brought to justice left-wing terrorists (Alexander and Pluchinsky, 1992;
Clutterbuck, 1992).
In the early 1990s, there was also a collective initiative by the EU to take a
united front against terrorism (Chalk, 1994; Wilkinson, 1992). These events coming around the
end of 1991 have been shown to decrease the amount of transnational terrorism (Enders and
Sandler, 1999, 2000). Thus, any analysis of post-9/11 terrorism must account for this structural
shift at the start of the post-Cold War era.
Data
The data on transnational terrorist incidents are drawn from International Terrorism: Attributes
of Terrorist Events (ITERATE), which records the incident date, its location, number of deaths,
number of injured, and other variables (Mickolus et al., 2004). For location, ITERATE records
the starting country location of the terrorist attack only 47 out of 12,569 transnational incidents
had no start location listed and these 47 events are excluded from our statistical analysis.
Variable 28 of ITERATE indicates the type of U.S. target (i.e., commercial property, military
installation, diplomatic, U.S. government, or nonofficial), while variables 34 and 39 denote the
number of Americans wounded or killed, respectively. Thus, we can distinguish not only attacks
against U.S. interests but also attacks with U.S. casualties. ITERATE data are derived from the
worlds newsprint and electronic media with a heavy reliance until 1996 on the Foreign
Broadcast Information Service (FBIS) Daily Reports, which survey a couple hundred of the
worlds major newspapers and related sources. By splicing together previous ITERATE data
sets, ITERATE 5s common file contains over 40 key variables common to all transnational
incidents from 1968:1 to 2003:4. ITERATE excludes actions involving insurgencies, declared
wars, or an occupying force. Thus, roadside bombs against coalition forces in Iraq after the end
of the Iraq War in 2003 are not recorded as transnational terrorism, but the kidnappings of
9
foreign workers in Iraq are included. ITERATE coding conventions are nearly identical to those
of the U.S. Department of State.
In total, we extract four quarterly time series from ITERATE. We use a quarterly, rather
than a more disaggregated time interval, to minimize periods with zero or near-zero
observations, which would violate the underlying normality assumption upon which our
inferential techniques rest. The ALL incident time series includes the quarterly totals for all
types of terrorist incidents for the 1968:1-2003:4 sample period. A second time series is the
casualty series, which contains all incidents with either a death and/or injury. We include two
series involving all targeted countries because the rise of fundamentalist terrorism and the other
shocks analyzed may result in non-U.S. targets being attacked. For example, coalition-of-thewilling countries are prone to al-Qaida attacks after 9/11. Moreover, fundamentalist terrorists
have grievances with a host of countries, including the United Kingdom, Spain, France, and
Israel. Approximately 60% of all transnational terrorist attacks is directed at non-U.S. targets.
Incidents with a U.S. target (i.e., a U.S. citizen or property) are a subset of the series with all
incidents, while casualty incidents with a U.S. target are a subset of either the casualty series or
the U.S. target series. These series are included to examine whether post-9/11 homeland security
upgrades in the United States may have shifted attacks against U.S. interests to other countries.
The two U.S. series can be thin in terms of zero or near-zero quarterly totals for some income
classes or geographical regions. This problem is then a concern that we address with appropriate
econometric procedures.
To examine the distribution of terrorism across countries income classes, we first use the
World Banks classification of countries into low, middle, and high per capita income nations.
Although income groupings are described in detail in each issue of the World Banks (various
years) World Development Report,5 we mention some of the key features of the classification
10
scheme. All World Bank member countries and others with populations in excess of 30,000 are
divided into three primary income groups LICs, MICs, and HICs. For 2000, LICs had a per
capita Gross National Income (GNI) of $755 or less, MICs had a per capita GNI greater than
$755 and less than or equal to $9,265, and HICs had a per capita GNI in excess of $9,265. These
dollar figures are adjusted annually to account for changes in a number of economic
circumstances including inflation, overall living standards, and exchange rates. Country codes
from ITERATE for location start of incidents allow us to associate terrorist events location to
the countrys income classification. Similarly, we can match terrorist events to other country
taxonomies described below.
In constructing our time series, we take account of the fact that individual nations may
switch among the three income groups. As a result of economic growth, the number of nations
included in the HIC group has generally increased, thereby working against a possible
transnational terrorism substitution from HICs to LICs. For instance, Algeria and Mexico moved
from the LIC group to the MIC group, whereas, Israel, Portugal, and Spain switched from the
MIC group to the HIC group owing to high per capita income growth. In the late 1980s, Poland
moved in the opposite direction from the class of MICs to LICs when it was a transition
economy, but returned to the MIC group in the mid-1990s.
When matching countries to terrorist attacks and income classes, we also had to adjust for
changes in the political map of Eastern Europe, Africa, and elsewhere over the entire sample
period. Prior to its division, ITERATE records terrorist incidents occurring in Czechoslovakia;
after its split, ITERATE separately keeps track of terrorist events in the Czech Republic and the
Slovak Republic. With respect to the Soviet Union, incidents before the breakup are attributed to
the U.S.S.R., while after the breakup they are assigned to the relevant new nations (e.g.,
Ukraine). The U.S.S.R. presents a potential concern because early issues of the World
11
Development Report recorded the per capita GNI of the U.S.S.R. as greater than that of Hong
Kong, Greece, or Spain. The accuracy of Soviet GNI data is doubtful, because it was artificially
inflated as a political tool in the Cold War. This does not present a real problem for our study,
because much of the focus is on the post-Cold War period. Moreover, throughout the sample
period, there were very few transnational terrorist incidents in the U.S.S.R. for example, just
four from 1980 to 1987.
For geographical groupings, we apply the regional classifications given in the U.S.
Department of State (2003) Patterns of Global Terrorism. These six regions are the Western
Hemisphere (North, Central, and South America), Africa (excluding North Africa), Asia (South
and East Asia, Australia, and New Zealand), Eurasia (Central Asia, Russia, and the Ukraine),
Europe (West and East Europe), and the Middle East (including North Africa). This partition of
countries puts most of the Islamic population into the Middle East, Eurasia, and Asia. The
geographical division does not correlate with the income taxonomy, so that geography is likely
to display different substitution possibilities before and after 9/11. The lack of correlation will
become apparent in the graphs displayed in the subsequent sections.
Distribution of Terrorist Incidents by Income Classes
Figure 1 displays four panels for the location of terrorist incidents by income groups for the
sample period, 1968:1-2003:4. In each panel, the quarterly number of incidents is measured on
the vertical axis, whose scale may differ between panels. Panel 1 depicts the quarterly total of all
incidents, while panels 2 to 4 show quarterly incident counts occurring in LICs, MICs, and HICs,
respectively. All four time paths indicate a decline around the start of 1992, during the start of
the post-Cold War era (Enders and Sandler, 2000). The panels also show an increase in incidents
following 9/11, with LICs and MICs displaying a more marked increase. In Figure 2, we display
12
the quarterly time series for terrorist incidents with one or more casualties for the entire sample
and the three income groups. For LICs, casualty incidents rose since the start of fundamentalist
terrorism in 1979:4 until 1992 when it started to decline. Following 9/11, there has been an
upward trend in casualty incidents, especially in LICs. The four panels of Figure 2 display that
LICs experienced by far the largest number of casualty incidents among the three income
classes.
[Figures 1 and 2 near here]
In Figure 3, the four quarterly time series are depicted by income group for terrorist
incidents against a U.S. target. Panel 2 shows that LICs generally suffered the largest number of
such attacks. There is also a somewhat more pronounced increase in these incidents in LICs
after 9/11 compared with the other income groups. When the time series for casualty incidents
against a U.S. target are plotted (not shown), there is also a marked upward trend of such attacks
in LICs.
[Figure 3 near here]
A useful way to simplify the long-run movements in these time series is to examine the
proportion of incidents staged in the LIC group. Figure 4 presents the proportion of each
incident type occurring in this income class. Because the proportions can be quite erratic, we
smoothe each series using a one-period lead and lag. If, for example, xt denotes the total
number of incidents of a particular type that occurs in period t, and yt represents the number of
incidents of that type that takes place in the LIC group in period t, the proportion of that incident
type in the LIC group ( pt ) in period t is constructed as:
pt = ( yt +1 + yt + yt 1 ) ( xt +1 + xt + xt 1 ) .
(3)
In Figure 4, panels 1 to 3 indicate a clear upward trend in the proportion of all incidents,
13
casualty incidents, and incidents with a U.S. target taking place in the LIC group.6 Although
there are now more casualty incidents with a U.S. target in LICs compared with earlier periods,
there is no clear upward trend for this series since 1979 (see panel 4). An interesting feature of
all four proportion series is that all experienced a sharp decline around 1999 and a sharp rise
following 9/11. The magnitude of the rebound is, however, smaller than the 1999 decline; thus,
the proportion of terrorist incidents in LICs is greater in the late 1990s than after 9/11.
Table 1 reports four descriptive statistics for the four quarterly time series for several
essential time periods. For example, the mean number of ALL incidents is 66.4 per quarter for
the time period between the end of the Cold War and 9/11 (1992:2-2001:2). Over the same time
period, the quarterly means for the LIC, MIC, and HIC groups are 42.9, 5.7, and 17.8 incidents,
respectively. We also list four descriptive statistics for each of the four time series in the nine
quarters prior to 9/11 and the nine quarters following 9/11. Table 1 also reports the proportion of
terrorist incidents occurring in LICs. Prior to 9/11, 74.3% of these incidents took place in LICs,
while following 9/11, only 57.0% occurred in LICs.
[Table 1 near here]
In contrast to the visual impressions of Figures 1 through 4, there appear to be only
modest differences in the pre-9/11 and post-9/11 series. The mean of the series including all
incidents rises from 42.3 to 46.6 incidents per quarter following 9/11; thus, the overall level of
terrorism rises by 10%. There is an interesting and unexpected change in the composition of
incidents by income categories. After 9/11, the mean number of incidents in LICs falls by 6.8
per quarter, while this mean in HICs rises by 7.3 per quarter. A more pronounced increase
characterizes incidents with casualties where the worlds mean rises from 12.9 incidents per
quarter before 9/11 to 20.6 incidents per quarter after 9/11. Although the overall level of
14
terrorism increases, the proportion of incidents with casualties in LICs falls from 72.2% to
67.9%. There is a 44% increase worldwide in the mean number of incidents with a U.S. target
(24.1/16.7 = 1.44) following 9/11, and more than a threefold increase in the mean number of
casualty incidents with a U.S. target (9.4 versus 2.6 incidents per quarter) following 9/11.
Because these incidents are not occurring in the United States, Americans may be safer at home
but not abroad in the aftermath of 9/11 and its security increases. About half of this increase
4.8 incidents per quarter occurred in LICs.
Statistical Analysis
Visual impressions and simple descriptive statistics do not replace formal inferential statistics.
Consider the increase in the number of casualty incidents in LICs that took place after 9/11.
Because this series is characterized by a number of increases and decreases, we must ascertain
whether this particular increase is statistically significant or just a random occurrence. To
determine whether the various incident series behaved differently following 9/11, we first
estimate each time series as an autoregressive (AR) process. Consider the AR(p) model:
p
yt = c + ai yt i + 1 FUND + 2 POST + 3 DP + 4 DL + t ,
(4)
i =1
where p is the number of lags, yt is the number of incidents of a particular type in period t, c is a
constant, ai s and i s are undetermined coefficients, and is an error term. Equation (4) is a
standard autoregressive model augmented by four dummy variables. DP and DL are dummy
(intervention) variables representing potential impacts of 9/11. DP is a pulse dummy that equals
1 if t = 2001:3 and 0 otherwise. A pulse intervention variable is appropriate if the 9/11 attack
induced a temporary change in the { yt } series. The magnitude of 3 indicates the initial effect
15
of 9/11 on the time series, and the rate of decay of this impact, if any, is determined by the
characteristic roots of equation (4). To allow 9/11 to have had a permanent effect on yt, we
include a level dummy variable such that DL is 0 for t < 2001:3 and is 1 for t 2001: 3 . The
immediate impact of 9/11 on { yt } is given by 4 , and the long-run effect is given by
4 (1 ai ) . We also include dummy intervention variables to control for the rise of religious
fundamentalism (FUND) and the post-Cold War era (POST). As identified by Enders and
Sandler (2000), FUND is a dummy variable taking a value of 1 beginning in the last quarter of
1979, and POST is a dummy variable taking a value of 1 beginning in the last quarter of 1991.
For each series, the lag length is selected by the Schwartz Bayesian Criterion (SBC). We
perform the tests without including time as a regressor, because there is no evidence of a
deterministic trend in any of the incident series.
Because we use count data and some of the time series are thin, we also obtain the
maximum likelihood estimates for thin series using a Poisson distribution. This distribution is
often used to model discrete variables that possess a reasonable number of observations near the
lower zero bound. For a given set of regressors xt, the Poisson model assumes that yt is
distributed with a probability density function:
f ( yt xt ) = e t t
( yt !) .
(5)
A Poisson distribution rules out negative realizations of yt. As is easily demonstrated, the
conditional mean E yt xt is t . We model this mean as:
t = exp c + ai ln ( yt i + bI t i ) + 1 FUND + 2 POST + 3 DP + 4 DL ,

i =1
where I t i is an indicator function that equals 0 if yt i > 0 and 1 if yt i = 0. The indicators

parameter is estimated using a grid search over the interval 0.1 b 0.9.
(6)
16
Equations (4) and (6) are similar in that FUND, POST, DP, and DL can all affect the mean
of yt. Unlike equation (4), we permit the mean to be influenced by ln(yt-i) instead of the level of
yt-i. The rationale for this specification is to prevent the { yt } sequence from becoming
explosive. The logarithmic specification, however, mandates replacing zero values of yt-i with
some positive number b. Another way to understand the issue is to rewrite equation (6) in the
multiplicative form,
p
t = ( yti ) exp [ c + 1 FUND + 2 POST + 3 DP + 4 DL ].

ai
(6)
i =1
In equation (6), yti = 0 is an absorbing state. For i p, the expected value of yt is zero when
any value of yti is zero. Insofar as the yt cannot be negative, the probability of a positive value
of yt is then zero. To rule out such an undesirable implication of the model, a small positive
value (i.e., b) is added to zero values of yti by equation (6).
Although we do not provide a complete discussion of the alternative models, some
comparison of the ordinary least squares (OLS) and Poisson estimation methodologies is in
order. Given that equation (4) contains the appropriate specification of the mean, the coefficient
estimate using OLS can be consistent, but any confidence interval constructed using a tdistribution may be severely distorted if the time series has zero or near-zero values. To assist
making appropriate inference, we report t-statistics based on robust standard errors. As shown in
equation (6) or (6), the Poisson model is nonlinear so that the coefficients do not have a
straightforward interpretation. Moreover, the specification in equation (6) and the need to add b
to zero values of yti seem ad hoc. In a related point, the mean and variance of a Poissondistributed variable are identical. When the variance of yt is substantially greater than the mean,
some researchers replace the Poisson distribution with a negative binomial. As shown in Table
17
1, most of the series exhibit no evidence of excess volatility in terms of their variance.
Given the limitations of the Poisson model, we typically report the OLS estimates with
robust standard errors. When, however, a time series is especially thin, we report the Poisson
estimate. If there are important differences between the OLS and the Poisson estimates, we
report the results of both.
Results
For each sample of countries, the results of the estimations for the four different incident types
are displayed in Table 2 below the corresponding series name. Our four samples include all
countries (WORLD) and the countries in the three designated income classes of the World Bank
(various years). The entries for WORLD are the sums of the associated incidents occurring in
the countries within the three income classes. Column 2 indicates the estimation method;
column 3 reports the number of lags; column 4 displays the pre-intervention intercept, c; and
columns 5 through 8 list 1 through 4 estimates. Column 9 reports the estimated long-run
(LR) value of the effect of DL as 4 (1 a1 a2 ... a p ) , and column 10 indicates the probvalue of the F-test for the joint hypothesis that 3 = 4 = 0 , i.e., for the null hypothesis that 9/11
did not have any significant impact on global terrorism patterns. Finally, column 11 displays the
prob-value of the Ljung-Box Q-statistic using 4 lags of the residuals. The coefficients tstatistics, calculated using robust standard errors, are depicted in parentheses beneath each
estimated coefficient.
[Table 2 near here]
To explain Table 2s entries, we first consider the estimates for the worldwide sample for
the ALL incident series. Because this series is quite thick (see panel 1 in Figure 1 where no
18
quarterly total approaches zero), we report only the OLS results using a lag of one. The rise of
fundamentalism increases the series intercept by 25.68 incidents per quarter, while the end of
the Cold War (POST) decreases the intercept by 37.35 incidents per quarter. Both of the tstatistics (2.98 and 3.49) exceed 1.96 in absolute value so that these two dummies are
statistically significant at the 5% level. The estimated coefficients on DP and DL are 30.13 and
13.26, respectively, with t-statistics for 3 and 4 of 3.34 and 1.18. Moreover, the Fstatistic for the joint restriction that 3 = 4 = 0 has a prob-value of 0.00; thus, we can conclude
that the decline in the number of incidents following 9/11 had a statistically significant
temporary, but not permanent component. Diagnostic checks indicate that the model is
adequate; for example, the reported prob-value for the Ljung-Box Q-statistic using 4 lags of the
residuals is 0.20.
For the time series with all incidents, the OLS estimates for the three income classes
indicate that FUND caused a significant increase in transnational terrorism of 27.56 incidents per
quarter for LICs, a significant decrease of 4.75 incidents per quarter for MICs, and no significant
change for HICs. Clearly, the influence of fundamentalist terrorism is income sensitive,
probably given the distribution of fundamentalist populations. All three income classes
experienced a significant decline in transnational terrorism in the post-Cold War period: 14.24
fewer incidents per quarter for LICs, 8.03 fewer incidents per quarter for MICs, and 13.80 fewer
incidents per quarter for HICs. There is no evidence of a substitution in overall transnational
terrorism from HICs to LICs following 9/11. In fact, the coefficients for both DP and DL are
negative and significant only for only LICs. Any long-run impact of the post-9/11 worldwide
decline in terrorist attacks was concentrated in LICs. The MIC sample experienced a temporary
fall in transnational terrorism, while the HIC sample did not register any significant effect as a
19
result of 9/11.7 The latter result indicates that any increased marginal costs from bolstered
homeland security in the HIC sample balanced any greater perceived marginal benefits that
terrorists derived from attacking these countries directly.
For the casualty series, there is little measurable influence of rise of fundamentalism or
the end of the Cold War on the income-based distribution of incidents. The sole exception is the
statistically significant decrease of 1.16 incidents per quarter in MICs as a result of the rise in
fundamentalist terrorism. A key finding is that there is no long-run impact of 9/11 on any of the
four samples. The two statistically significant coefficients of DP are 6.78 and 4.38 for LICs and
HICs, respectively. This result suggests an immediate and temporary switch in the composition
of casualty incidents from LICs to HICs, perhaps as groups sympathetic to al-Qaida tried to raise
anxiety in high-income countries in the wake of 9/11, as their perceived marginal benefits
increased in HIC venues.
Next, we turn to incidents with a U.S. target. For the OLS results, fundamentalist
terrorism had little influence except for a marginally significant increase in LICs, while the end
of the Cold War resulted in significant decreases for all four samples with the largest decrease
occurring in HICs. There was a significant temporary decline in terrorism following 9/11 of
17.44 incidents per quarter associated with the WORLD sample, where most of this decrease
(i.e., 12.54 fewer incidents per quarter) was concentrated in LICs. For the OLS estimates, DL is
only significant for the HIC sample. The Poisson estimates for the thin MICs and HICs series
reflect a small, but significant, positive coefficients for DL.
The casualty series with a U.S. target is particularly thin for the three income classes;
thus, the Poisson estimates are reported. For LICs, we also display the OLS estimates since the
OLS and Poisson results differ for DP and DL. The primary finding concerns the long-run impact
of 9/11. The OLS estimate of 4 for WORLD is 4.58 additional incidents per quarter with a t-
20
statistic of 2.26. The value of 4 for LICs is 3.45 additional incidents per quarter and the tstatistic is 2.21. Most of the OLS-identified increase in attacks involving U.S. casualties was in
LICs, consistent with the greater concentration of U.S. targeted incidents in LICs owing to lower
anticipated marginal costs. The Poisson estimates of 4 are, however, positive and significant
for all income groups.
Alternative Search for Income-Based Substitution

To show the robustness of our income-based results, we apply an alternative partition of
countries into income classes that does not rely on the World Bank tripartite classification based
on cutoff per-capita GNI levels. We assign the 31 countries with the highest per capita GNI
according to the World Bank (2000) to the HIC group and all others to the LIC group. These 31
HICs include most member states of the Organization of Economic Cooperation and
Development (OECD) plus some other countries.8 Table 3 displays summary statistics for the
LICs, HICs, and LICs/WORLD based on the new partition for the four time series. Most
transnational terrorism had been staged in LICs during the 1990s. Prior to 9/11, HICs
experienced just 5.6 incidents per quarter on average, while LICs suffered 37.3 incidents per
quarter on average. During the nine quarters following 9/11, the quarterly mean rose in HICs
and fell slightly in LICs. Incidents with casualties are associated with an increase in their
quarterly means in both LICs and HICs after 9/11. A similar pattern holds for the two time
series involving a U.S. target, with a large apparent substitution to LICs for casualty incidents
with a U.S. target after 9/11. These impressions are now tested with the AR intervention model
represented in equations (4) and (6) above.
[Table 3 near here]
21
Table 4 indicates the empirical results. When countries are partitioned in this new
fashion, the rise of fundamentalism had virtually all of its impact in LICs for all incidents and
those involving casualties. The rise of fundamentalist terrorism is associated with a large and
statistically significant increase in transnational terrorism attacks in LICs of 24.38 incidents per
quarter. Casualty incidents rose by 3.24 per quarter in LICs. A similar finding holds for casualty
incidents with a U.S. target: The coefficient for fundamentalism is positive and significant for
the Poisson test, and positive and marginally insignificant for OLS. Thus, our new partition
shows that the impact of fundamentalism was entirely based in LICs. A different pattern
emerges with respect to the decline in transnational terrorism in the post-Cold War period. For
the ALL incident series, the decline was virtually evenly split between LICs and HICs. The only
significant POST decline for incidents with casualties occurred in HICs. Following the Cold
War, there was a significant decline in incidents with a U.S. target for both income classes, with
the biggest drop characterizing HICs. This was also the case for casualty incidents with a U.S.
target. Thus, the worlds richest countries experienced the largest decline in deadly transnational
terrorism following the end of the Cold War but prior to 9/11, as state-sponsorship declined and
terrorist resources fell.
[Table 4 near here]
A mixed picture emerges with respect to the influence of 9/11. Immediately following
9/11, the total number of incidents fell by 27.79 per quarter in LICs, but displayed no significant
change in HICs. Moreover, neither income class experienced a permanent impact in total
terrorism after 9/11 i.e., the coefficient on DL is not significant. For incidents with casualties,
there was an immediate decrease of 8.45 incidents per quarter in LICs and an increase of 4.30
incidents per quarter in HICs , almost equal to the four hijackings on 9/11. There was again no
permanent 9/11 influence. Both series involving U.S. targets fell in LICs temporarily after 9/11.
22
However, incidents with a U.S. target increased permanently by 3.92 incidents per quarter in
HICs following 9/11. The Poisson result reinforces this finding. For casualty incidents with a
U.S. target, most of the worldwide increase of 4.59 incidents per quarter was in LICs where such
incidents rose by 3.56 incidents per quarter. Although there was also an increase in such
incidents in HICs, this increase was more modest, judging from the OLS results. Thus, there was
a greater concentration of deadly post-9/11 incidents involving a U.S. target in LICs, consistent
with the earlier findings and the view that homeland security upgrades in rich countries protected
Americans there. There is, however, an increased risk for American interests in LICs following
9/11 from transference of attacks.
The Distribution of Terrorism across Regions
The six panels of Figure 5 depict the time series with all incidents for the six designated regions.
Panels 1 and 2 show a sustained decrease in transnational terrorism beginning in the early 1990s
for the Western Hemisphere and Europe, respectively. In panel 3, the Middle East displays an
increase in transnational terrorism for the start of the 1990s, followed by a fall around 1993 and
then an increase around 9/11. A similar increase occurs for Asia following 9/11 in panel 4. In
panels 5 and 6, there is a jump in transnational terrorism in Africa and Eurasia at the start of the
1990s, followed by decreases and increases over the ensuing years. Some of the regional
incident patterns in Figure 5 (see, especially, Africa, Eurasia, and the Middle East) do not match
those in Figure 1 when countries are partitioned by income classes. Hence, the geographical
identification provides new insights on attack patterns.
Figure 6 depicts the casualty series for the six geographical regions. The most striking
feature is the sharp upward trend in these terrorist incidents in the Middle East starting in 2000,
23
with a pronounced increase following 9/11. Much smaller increases characterize the other
regions. In Asia (panel 4), the increase in terrorist incidents after 9/11 is followed by a decrease.
Some of the series, especially that of Eurasia, may be too thin to conduct meaningful statistical
analysis.
Table 5 reports that the descriptive statistics for three periods for the four incident series
and the six geographical regions.9 We focus our remarks on the time series that includes all
incidents. For the 1992:2-2001:2 period, Europes mean of 19.27 incidents per quarter exceeds
that of the other regions. The quarterly mean of terrorist incidents in the Western Hemisphere
(11.84), Africa (10.05), the Middle East (12.92), and Asia (9.76) are all quite similar; there are,
however, some contrasting regional changes for the two time intervals surrounding 9/11. In the
nine pre-9/11 quarters, the Western Hemisphere and Africa experienced an average of 12.33 and
9.44 incidents per quarter, respectively; in the nine post-9/11 quarters, the Western Hemisphere
and Africa experienced an average of 5.33 and 2.44 incidents per quarter, respectively. These
are rather drastic declines. In sharp contrast, the Middle East and Asia had incident means that
rose very sharply from 4.78 and 7.78 to 15 and 13 incidents per quarter, respectively, for the
same comparison intervals. The mean number of European incidents showed a modest rise from
6.33 to 10.78 incidents per quarter.
[Table 5 near here]
In the casualty series, the Middle East displayed the largest change on either side of 9/11
a rise of almost 8.5 incidents per quarter. In contrast, Africas casualty series fell by 2.78
incidents per quarter. For incidents with a U.S. target, the Western Hemisphere experienced a
reduction of 5.89 incidents per quarter when the periods on either side of 9/11 are compared.
Europe, the Middle East, and Asia, however, attracted more U.S.-targeted events following 9/11.
24
This same pattern held for the Middle East and Asia for casualty incidents with a U.S. target.
To formalize these impressions, we again conduct an AR intervention analysis for each
incident type in each region.10 The empirical results are summarized in Table 6. For all
incidents, the rise of fundamentalism was associated with a significant increase in terrorism in
Africa, Asia, and the Middle East, but not in the other three regions. The increase is greatest in
the Middle East. The post-Cold War period is associated with less transnational terrorism in the
Western Hemisphere, Europe, the Middle East, and Asia, which is due, in part, to the reduced
sponsorship by the Soviet-bloc countries and the demise of many left-wing European groups
(Enders and Sandler, 1999). In contrast, Eurasia had more terrorism during the post-Cold War
period, a result characteristic of fledgling democracies (Eubank and Weinberg, 1994). Africa,
the Middle East, and Asia experienced a significant immediate decline in terrorism following
9/11, as shown by the estimate of the DP coefficient. The Western Hemisphere, Eurasia, and
Africa had a significant long-term decrease in terrorism after 9/11. Asia showed a significant but
small increase. When these results are evaluated in conjunction with Table 5, there is strong
evidence that all regions experienced on balance a post-9/11 decline in terrorism due, in part, to
the war on terror and attacks against al-Qaida and associates.
[Table 6 near here]
The empirical results for the casualty series are similar to those for the ALL incident
series. The increase in fundamentalism was associated with a significant increase in casualty
incidents in Africa, the Middle East, and Asia. For the latter two regions, there are strong
fundamentalist populations and influences. The post-Cold War era experienced a significant fall
in casualty incidents in the Western Hemisphere and a significant rise in Eurasia. The various
results for Europe are ambiguous since the OLS and Poisson estimates have some marked
differences: e.g., the coefficient for the post-Cold War era (POST) is negative and insignificant
25
for OLS, but negative and significant for Poisson. The Western Hemisphere displays a positive
and significant temporary increase in casualty incidents during the post-9/11 period. The Middle
East and Asia experienced a temporary drop in these events after 9/11. The OLS estimates show
that no region displayed a permanent and significant change (at the 5% level) in casualty
incidents following 9/11. The decline for Europe is only significant for the Poisson estimation.
Overall, there is less evidence of a permanent 9/11-induced fall of casualty events compared with
ALL events. This finding is consistent with transnational terrorist incidents remaining deadly in
the post-Cold War era.
Interestingly, the rise of fundamentalism is not associated with a significant effect on the
number of incidents against U.S. interests in any region but Eurasia, where there is a negative
and significant impact. The positive influence of fundamentalist terrorism in Asia is almost
significant at the 5% level. The end of the Cold War or POST resulted in region-specific
differences: There is a negative and significant impact in the Western Hemisphere, Europe, the
Middle East, and Asia. Again, these findings can be partly explained by reduced statesponsorship of terrorism and the demise of many left-wing groups in Europe. In contrast, the
end of the Cold War is tied to a rise in incidents involving U.S. targets in Eurasia and Africa,
where there was greater political instability in the 1990s. The pulse dummy for 9/11 indicates a
negative and significant fall in U.S.-targeted events in Europe, the Middle East, and Asia.
During the post-9/11 period, there are marginally significant permanent declines in incidents
involving U.S. targets in the Western Hemisphere and Africa. There is, however, a significant
positive increase in the coefficient for DL in the Middle East. This result is strongly suggestive
of a transfer of U.S.-targeted events from North America and other venues to targets in the
Middle East, in keeping with the terrorists responding to augmentations in U.S. homeland
security.
26
Finally, we turn to the regional effects tied to casualty incidents with a U.S. target. In
Table 6, the rise in fundamentalism is not associated with any significant changes in these
incidents. In contrast, POST leads to significant drops in these events in the Western
Hemisphere and Europe. The so-called peace dividend derived from the end of the Cold War
involved not only reduced military spending but also a decrease in terrorism directed at U.S.
interests owing to less state-sponsorship. There is, however, a significant increase in such events
in Africa following the end of the Cold War. The 9/11 pulse coefficient reflects a temporary but
significant rise in casualty incidents with a U.S. target in the Western Hemisphere and a
significant decrease in the Middle East and Asia after 9/11. More important, the level impact of
9/11 is quite different: Both the Middle East and Asia experienced a significant increase in these
events, while Africa experienced a marginally significant decrease. For the Middle East and
Asia, we again see a geographical switch of venue following 9/11 possibly coinciding with
increases in security in the wealthy countries and the associated increases in the costs of carrying
out an attack Ci.
Concluding Remarks
We apply time-series methods to identify shifting patterns of transnational terrorism across

countries income classes and geographical distribution in response to three defining events.
Intuition and eyeballing of data may give different impressions than careful statistical analysis
that controls for important interventions such as the rise of fundamentalism, the end of the Cold
War, and 9/11. Although intuition suggests a substitution of terrorist events from rich to poor
countries in response to 9/11-motivated increases in homeland security in some rich countries
(especially the United States and the EU) and the terrorists hunt for soft targets, we find no
convincing evidence of this shift except for incidents with U.S. casualties. Our failure may be
27
due to offsetting factors (i.e., increased marginal costs and higher marginal benefit of terrorist
incidents) or the rather low beginning GNI per capita level for designating HICs and MICs. To
address the latter concern, we reclassify HICs as those with the 31 highest per capita GNIs and
look for a transference of terrorist events after 9/11 from HICs to LICs. Again, we find no
evidence of an income-based transfer in the anticipated direction except for incidents with U.S.
casualties, so that our results are robust to an alternative income taxonomy.
When countries are classified into six regional groups, there is evidence of shifting
venues based on geography. For terrorist incidents with a U.S. target, a clear transference away
from the Western Hemisphere and Africa to the Middle East and Asia is uncovered. In addition,
the augmenting influence of the rise of fundamentalism on transnational terrorists was greatest in
the Middle East and Asia, where there are large Islamic populations. The end to the Cold War
and the breakup of the Soviet Union reduced transnational terrorism in most regions except
Eurasia, where it has increased with augmented political instability. The effects of
fundamentalism and the end of the Cold War on terrorism differed markedly between incomebased and geographically based partitions of countries.
While Americans are safer at home owing to enhanced homeland security, the
vulnerability of U.S. citizens and property abroad has increased following 9/11. This
vulnerability probably also applies to other prime-target countries, particularly those identified as
assisting the U.S. agenda in the Middle East. The U.S. policy to assist LICs that request help11
does not go far enough given the changing post-9/11 pattern of the transnational terrorism aimed
at U.S. targets. Soft targets can exist anywhere and our analysis identifies increased post-9/11
attacks not only in HICs but also in the Middle East and Asia. Thus, U.S. assistance must
account for changing patterns of attacks against U.S. and other interests. Our study shows that
this pattern may go against intuition owing to opposing considerations and be more
28
geographically based. For example, post-9/11 attacks in Saudi Arabia have involved a wealthy
Middle East country. Todays fundamentalist terrorism is shifting to the Middle East and Asia,
where large support populations exist and terrorists do not have to transcend fortified borders to
attack U.S. and Western interests. Thus, regions that once experienced greater spillover
terrorism from the Middle East and Africa (e.g., Europe in the 1980s) may want to reallocate
some homeland security spending to these regions to protect their interests.
Our time-series analysis identifies where the United States and the international
community need to direct their security efforts in light of recent events. In a globalized world
with transnational terrorism, countries must realize that terrorists will react to homeland security
upgrades by identifying weaker links abroad. The ability to shore up the weakest links
worldwide requires collective action beyond efforts observed to date. Such actions are prone to
free riding as countries wait for the prime-target countries to act. Past events the rise of
fundamentalist terrorism and the end to the Cold War demonstrate that transnational terrorism
patterns can change rather drastically. Both events have had a greater influence on patterns than
9/11. Moreover, this change in terrorism patterns may be geographically, rather than income
driven. There is clearly a need to keep track of such changes if defenses are to be appropriately
deployed.
29
References
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Atkinson, Scott E., Todd Sandler, and John Tschirhart (1987) Terrorism in a Bargaining
Framework. Journal of Law and Economics 30:121.
Cameron, A. Colin, and Pravin Trivedi (1998) Regression Analysis of Count Data. Cambridge:
Cambridge University Press.
Chalk, Peter (1994) EU Counter-Terrorism, the Maastricht Third Pillar and Liberal Democracy
Acceptability. Terrorism and Political Violence 6:103145.
Clutterbuck, Richard (1992) Keeping Track of Terrorists after 1992. Terrorism and Political
Violence 4:301306.
Enders, Walter, and Todd Sandler (1993) The Effectiveness of Anti-Terrorism Policies: A
Vector-Autoregression-Intervention Analysis. American Political Science Review
87:829844.
Enders, Walter, and Todd Sandler (1995) Terrorism: Theory and Applications. In Handbook
of Defense Economics, Vol. I, edited by K. Hartley and T. Sandler, pp. 213249.
Amsterdam: North-Holland.
Enders, Walter, and Todd Sandler (1999) Transnational Terrorism in the Post-Cold War Era.
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Enders, Walter, and Todd Sandler (2000) Is Transnational Terrorism Becoming More
Threatening? A Time-Series Investigation. Journal of Conflict Resolution 44:307332.
Enders, Walter, and Todd Sandler (2006) The Political Economy of Terrorism. Cambridge:
Cambridge University Press, forthcoming.
Eubank, William L., and Leonard B. Weinberg (1994) Does Democracy Encourage Terrorism?
30
Terrorism and Political Violence 64:417435.
Hoffman, Bruce (1997) The Confluence of International and Domestic Trends in Terrorism.
Terrorism and Political Violence. 9:115.
Hoffman, Bruce (1998) Inside Terrorism. New York: Columbia University Press.
Kunreuther, Howard, and Erwann Michel-Kerjan (2004) Dealing with Extremist Events: New
Challenges for Terrorist Risk Coverage. Unpublished manuscript, Wharton, University
of Pennsylvania, Philadelphia, PA.
Landes, William M. (1978) An Economic Study of U.S. Aircraft Hijackings, 1961-1976.
Journal of Law and Economics 21:131.
Li, Quan (2005) Does Democracy Promote or Reduce Transnational Terrorist Incidents? Journal
of Conflict Resolution 49:278297.
Li, Quan, and Drew Schaub (2004) Economic Globalization and Transnational Terrorism.
Journal of Conflict Resolution 48:230258.
Mickolus, Edward F. (1989) What Constitutes State Support to Terrorists? Terrorism and
Political Violence 1:287293.
Mickolus, Edward F., Todd Sandler, Jean M. Murdock, and Peter Flemming (2004) International
Terrorism: Attributes of Terrorist Events, 1968-2003 (ITERATE 5). Dunn Loring, VA:
Vinyard Software.
Pape, Robert A. (2003) The Strategic Logic of Suicide Terrorism. American Political Science
Review 97:343361.
Quillen, Chris (2002) A Historical Analysis of Mass Casualty Bombers. Studies in Conflict &
Terrorism 25:279292.
Sandler, Todd, and Walter Enders (2004) An Economic Perspective on Transnational Terrorism.
European Journal of Political Economy 20:301316.
31
Sandler, Todd, John Tschirhart, and Jon Cauley (1983) A Theoretical Analysis of Transnational
Terrorism. American Political Science Review 77:3654.
U.S. Department of State (1988, 2003) Patterns of Global Terrorism. Washington, DC: U.S.
Wilkinson, Paul (1992) The European Response to Terrorism: Retrospect and Prospect. Defence
Economics 3:289304.
Wolgast, Michael (2002) Global Terrorism and the Insurance Industry: New Challenges and
Policy Responses. Paper presented at the DIW (Deutsches Institut fr
Wirtschaftsforschung) Workshop, The Economic Consequences of Global Terrorism,
June 1415, Berlin.
World Bank (1978, 1980, 1990, 1995, 2000) World Development Report. New York:
Oxford University Press.
32
Notes
1. The April 10, 1992, bombing of the London financial district by the Irish Republican
Army caused $2.9 billion of losses, making it the most costly terrorist incident prior to 9/11.
2. In the United States, homeland security involves securing targets at home (Enders and
Sandler, 2006: Chapter 10). Upgrades to U.S. embassies and military installations abroad started
in 1976 and 1985, well before 9/11 (Enders and Sandler, 1993). For the United States, except for
a few years, there is no homeland security expenditure data; thus, we cannot explicitly add this
variable. We can, however, infer that rich countries are more able to afford homeland security.
Moreover, some wealthy nations (e.g., Israel, Spain, the United Kingdom, and the United States)
are motivated to augment security because their interests are prime targets of terrorists.
3. Pioneering studies include Landes (1978), Sandler, Tschirhart, and Cauley (1983),
and Atkinson, Sandler, and Tschirhart (1987).
4. The average terrorist incident kills one person, while a suicide mission murders
thirteen.
5. We used the 1978, 1980, 1990, 1995, and 2000 volumes of the World Development
Report to track changes in the countries income classifications.
6. We use smoothed proportions in Figure 4 only; the actual proportions are utilized in
our statistical analysis.
7. We also ran a three-variable vector-autoregressive (VAR) model with separate
estimating equations for LICs, MICs, and HICs. For each equation, current variables of
incidents in each income class are regressed against past values of incidents in each of the three
income classes and the four intervention dummies. The results for the ALL series is virtually
identical to the single-equation estimates. These results are available from either author upon
request.
33
8. The 31 countries are: Luxembourg, Norway, the United States, Switzerland,
Denmark, Iceland, Austria, the Netherlands, Canada, Belgium, Hong Kong, Japan, Ireland,
Germany, France, Australia, the United Arab Emirates, the United Kingdom, Finland, Italy,
Sweden, Singapore, Spain, Israel, Macao, New Zealand, Kuwait, Malta, Cyprus, Portugal, and
Greece.
9. Figures 5 and 6 display the pattern of the time series for the entire period and show
whether a series is thin in terms of zero values. Table 5 gives a more focused characterization of
the series for the post-Cold War and 9/11 periods.
10. A spatial econometric specification requires a nonlinear estimator that conflicts with
our linear time-series approach. Spatial estimation is reserved for another paper.
11. This assistance is one of the four pillars of U.S. antiterrorism policy (U.S. Department
of State, 2003).
Figure 1: Location of Incidents by Income Group

Panel 1: All Incidents
Panel 2: LIC Incidents
350
225
200
300
incidents per quarter
175
250
200
150
100
50
150
125
100
75
50
25
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Panel 3: MIC Incidents
Panel 4: HIC Incidents
70
225
200
60
175
50
40
30
20
10
150
125
100
75
50
25
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Figure 2: Location of Casualty Incidents by Income Group

Panel 1: All Casualty Incidents
Panel 2: LIC Casualty Incidents
60
50
40
50
40
30
20
10
30
20
10
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Panel 3: MIC Casualty Incidents
Panel 4: HIC Casualty Incidents
40
50
40
50
30
20
10
30
20
10
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Figure 3: Incidents with a U.S. Target by Income Group

Panel 1: All Incidents w ith a U.S. Target
Panel 2: LIC Incidents w ith a U.S. Target

90
140
80
70
120
160
100
80
60
40
20
60
50
40
30
20
10
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Panel 3: MIC Incidents w ith a U.S. Target
Panel 4: HIC Incidents w ith a U.S. Target

80
70
70
90
80
90
60
50
40
30
20
10
60
50
40
30
20
10
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Figure 4: Proportion of Incident Types in the LIC Group

Panel 1: Proportion of Incidents in the LIC Group
1.0
Panel 2: Proportion of Casualty Incidents

1.0
0.9
0.8
0.8
0.7
0.6
0.6
0.5
0.4
0.4
0.3
0.2
0.2
0.1
0.0
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
1968
Panel 3: Proportion of Incidents w ith a U.S. Target

1.0
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
Panel 4: Proportion of Casualty Incidents w ith a U.S. Target

1.00
0.9
0.8
0.75
0.7
0.6
0.50
0.5
0.4
0.25
0.3
0.2
0.1
0.00
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
Figure 5: Incidents by Region

Panel 1: Western Hemisphere
Panel 2: Europe
90
Panel 3: Middle East
175
80
64
56
150
70
48
50
40
30
125
60
100
75
50
20
25
10
0
1972
1976
1980
1984
1988
1992
1996
2000
32
24
16
0
1968
40
0
1968
1972
1976
Panel 4: Asia
1980
1984
1988
1992
1996
2000
1968
Panle 5: Africa
150
1972
1976
1980
1984
1988
1992
1996
2000
Panel 6: Eurasia
45
40
35
100
75
50
125
30
25
20
15
6
5
4
3
10
25
0
1968
1972
1976
1980
1984
1988
1992
1996
2000
0
1968
1972
1976
1980
1984
1988
1992
1996
2000
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Figure 6: Casualty Incidents by Region

Panel 1: Western Hemisphere
Panel 2: Europe
Panel 3: Middle East
25
25
20
15
10
30
30
25
30
20
15
10
0
1972
1976
1980
1984
1988
1992
1996
2000
15
10
0
1968
20
0
1968
1972
1976
Panel 4: Asia
1980
1984
1988
1992
1996
2000
1968
Panle 5: Africa
20.0
1972
1976
1980
1984
1988
1992
1996
2000
Panel 6: Eurasia
30
17.5
7
25
12.5
10.0
7.5
5.0
15.0
20
15
10
5
2.5
0.0
0
1968
1972
1976
1980
1984
1988
1992
1996
2000
0
1968
1972
1976
1980
1984
1988
1992
1996
2000
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
TABLE 1. Summary Statistics of the Various Incident Types by Income Group

Start
End
Mean Variance Min Max
Mean Variance Min
Max
Series
ALL Incident Types
Incidents with Casualties
WORLD 1992:2 2001:2
66.4
44.0
10
242
22.7
14.3
4
57
1999:2 2001:2
42.3
22.2
10
82
12.9
7.3
4
26
2001:4 2003:4
46.6
29.4
17
105
20.6
12.8
7
43
LICs 1992:2 2001:2
42.9
24.7
6
125
16.5
11.3
2
50
1999:2 2001:2
33.1
20.4
6
72
9.9
6.8
2
23
2001:4 2003:4
26.3
16.8
8
58
14.0
9.5
4
34
MICs 1992:2 2001:2
5.7
3.9
0
16
2.3
2.2
0
9
1999:2 2001:2
3.7
1.1
2
5
1.8
1.5
0
5
2001:4 2003:4
7.3
8.7
0
23
2.8
3.0
0
8
HICs 1992:2 2001:2
17.8
28.7
2
171
4.0
4.6
0
21
1999:2 2001:2
5.6
2.3
2
9
1.2
1.1
0
3
2001:4 2003:4
12.9
8.1
5
26
3.8
2.0
0
7
LICs/WORLD 1992:2 2001:2
67.5% 0.145 0.262 0.878
71.8%
0.122 0.385 0.913
1999:2 2001:2
74.3% 0.095 0.600 0.878
72.2%
0.134 0.500 0.885
2001:4 2003:4
57.0% 0.117 0.394 0.758
67.9%
0.112 0.500 0.857
Incidents with a U.S. Target Casualty Incidents with a U.S. Target
WORLD 1992:2 2001:2
16.2
10.4
3
38
3.9
3.3
0
17
1999:2 2001:2
16.7
12.9
3
38
2.6
1.2
0
4
2001:4 2003:4
24.1
17.1
8
59
9.4
6.5
1
20
LICs 1992:2 2001:2
12.3
9.6
2
35
2.9
3.0
0
16
1999:2 2001:2
13.9
12.8
3
33
1.9
1.3
0
4
2001:4 2003:4
13.6
9.4
4
33
6.7
4.7
1
14
MICs 1992:2 2001:2
1.6
1.9
0
10
0.4
0.7
0
3
1999:2 2001:2
1.0
0.9
0
2
0.4
0.5
0
1
2001:4 2003:4
4.3
5.4
0
16
1.0
1.9
0
6
HICs 1992:2 2001:2
2.3
2.2
0
8
0.6
0.8
0
3
1999:2 2001:2
1.8
2.5
0
7
0.2
0.4
0
1
2001:4 2003:4
6.2
4.9
0
16
1.8
1.2
0
4
LICs/WORLD 1992:2 2001:2
73.6% 0.183 0.250 1.000
71.6%
0.243 0.000
1.000
1999:2 2001:2
78.7% 0.210 0.333 1.000
69.8%
0.209 0.500
1.000
2001:4 2003:4
57.1% 0.133 0.366 0.778
71.1%
0.119 0.333
1.000
Notes: LICs denotes low-income countries; MICs indicates middle-income countries; and HICs depicts high-income countries.
Min is the smallest quarterly total, and Max is the largest quarterly total.
TABLE 2. OLS and Poisson Estimates of Intervention Variables

Region
Method Lags
c
FUND
POST
DP
ALL Incident Types
WORLD
OLS
1
61.29
25.68
-37.35
-30.13
(5.66)
(2.98)
(-3.49)
(-3.34)
LICs
OLS
1
21.61
27.56
-14.24
-21.26
(5.68)
(4.68)
(-2.58)
(-4.10)
MICs
OLS
1
18.15
-4.75
-8.03
-5.91
(6.93)
(-2.08)
(-4.61)
(-2.22)
HICs
OLS
2
19.32
2.99
-13.80
-2.22
(4.88)
(0.84)
(-2.33)
(-0.83)
WORLD
OLS
2
6.63
2.59
-2.73
-3.41
(3.72)
(1.17)
(-1.16)
(-1.09)
LICs
OLS
2
2.44
2.97
-0.80
-6.78
(2.79)
(1.66)
(-0.48)
(-3.02)
MICs
OLS
1
3.46
-1.16
-0.77
-1.38
(6.27)
(-2.28)
(-1.66)
(-1.58)
HICs
OLS
3
2.67
0.11
-1.58
4.38
(3.25)
(0.10)
(-1.27)
(5.44)
Incidents with a U.S. Target
WORLD
OLS
1
29.86
0.10
-15.96
-17.44
(6.19)
(0.02)
(-4.15)
(-3.34)
LICs
OLS
1
10.30
4.09
-5.04
-12.54
(4.69)
(1.95)
(-2.24)
(-4.19)
MICs
OLS
2
6.59
-3.00
-2.62
-3.16
(4.38)
(-1.95)
(-2.38)
(-1.70)
Poisson
1
1.92
-0.45
-0.96
-32.77
(23.70) (-5.88)
(-6.62)
(0.00)
HICs
OLS
1
10.68
-0.45
-7.83
-1.28
(6.56)
(-0.28)
(-5.92)
(-0.79)
Poisson
1
2.35
-0.04
-1.44
-0.21
(32.09) (-0.67) (-11.46) (-0.45)
Casualty Incidents with a U.S. Target
WORLD
OLS
2
4.62
0.83
-2.48
-3.09
(5.51)
(1.10)
(-2.90)
(-1.54)
LICs
OLS
1
2.49
1.72
-1.58
-6.31
(6.64)
(3.53)
(-2.63)
(-4.17)
Poisson
1
0.96
0.45
-0.38
-34.35
(10.32)
(3.92)
(-3.24)
(0.00)
MICs
Poisson
1
0.53
-0.67
-0.70
-34.01
(4.67)
(-3.42)
(-2.36)
(0.00)
HICs
Poisson
1
0.40
0.10
-0.99
1.16
(3.31)
(0.58)
(-3.99)
(2.18)
DL
LR
Q(4)
-13.26
(-1.18)
-12.48
(-1.85)
1.35
(0.50)
-1.36
(-0.29)
-17.71
0.00
0.20
-15.24
0.00
0.31
1.49
0.00
0.29
-2.56
0.45
0.89
9.37
0.53
0.52
8.28
0.00
0.71
0.79
0.02
0.92
-0.19
0.00
0.52
8.18
0.00
0.76
1.98
0.00
0.30
2.78
0.00
0.26
2.79
(0.78)
2.47
(0.96)
0.54
(0.57)
-0.06
(-0.06)
7.01
(1.30)
1.50
(0.46)
1.69
(0.90)
0.86
(4.21)
3.89
(2.42)
0.96
(5.53)
4.58
(2.26)
3.45
(2.21)
0.75
(4.68)
0.86
(2.07)
1.04
(3.07)
0.00
3.85
0.00
0.37
0.00
6.08
0.00
0.89
3.89
0.00
0.25
0.00
0.12
0.00
Notes: Column 2 refers to the estimation method; column 3 indicates the number of lags; column 4 is the pre-intervention intercept;
and columns 5-8 indicate coefficient estimates. FUND denotes the rise in fundamentalist terrorism; POST indicates the end of the
Cold War; DP is a pulse dummy for 9/11; DL is a level dummy for 9/11; LR is the long-run effect of 9/11; F is the F-statistic, and
Q(4) is Ljung-Box Q-statistic using 4 lags.
TABLE 3. Summary Statistics of the Various Incident Types by Income Group for Alternative Classification
Start
End
Mean Variance Min Max
Mean Variance
Min
Max
Series
ALL Incident Types
LICs
1992:2 2001:2
49.0
25.7
8 130
18.8
11.5
3
53
1999:2 2001:2
37.3
21.6
8
79
11.8
7.0
4
25
2001:4 2003:4
34.1
23.4
10
80
16.8
11.9
5
40
HICs
1992:2 2001:2
17.7
27.5
2 163
3.9
4.7
0
21
1999:2 2001:2
5.6
2.3
2
9
1.2
1.1
0
3
2001:4 2003:4
12.8
7.9
5
25
3.8
2.0
0
7
LICs/WORLD 1992:2 2001:2
77.7%
0.142 0.329 0.929
85.2%
0.115
0.563
1.000
1999:2 2001:2
85.2%
0.053 0.763 0.929
90.6%
0.090
0.769
1.000
2001:4 2003:4
70.8%
0.114 0.526 0.846
79.1%
0.124
0.625
1.000
LICs
1992:2 2001:2
14.2
10.1
3
37
3.4
3.2
0
16
1999:2 2001:2
15.0
12.5
3
33
2.4
1.2
0
4
2001:4 2003:4
18.2
13.8
4
49
7.7
5.7
1
14
HICs
1992:2 2001:2
2.1
2.0
0
7
0.5
0.8
0
3
1999:2 2001:2
1.8
2.5
0
7
0.2
0.4
0
1
2001:4 2003:4
6.2
4.9
0
16
1.8
1.2
0
6
LICs/WORLD 1992:2 2001:2
84.6%
0.150 0.417 1.000
84.9%
0.231
0.000
1.000
1999:2 2001:2
87.8%
0.193 0.417 1.000
90.6%
0.186
0.500
1.000
2001:4 2003:4
73.4%
0.152 0.500 1.000
79.6%
0.121
0.667
1.000
Notes: HICs depicts the 31 countries with highest per-capita GNI in 2000, while LICs denotes all other countries. See Table 1 for the
WORLD statistics.
TABLE 4. OLS and Poisson Estimates of Intervention Variables for Alternative Income Classification
Method Lags
c
FUND
POST
DP
DL
LR
F
Region
ALL Incident Types
LICs
OLS
1
34.54
24.38
-16.90
-27.79
-11.92 -13.89 0.00
(6.24)
(3.84)
(-2.77) (-3.89) (-1.41)
HICs
OLS
2
22.13
2.87
-16.99
-1.99
-1.16
-2.27 0.54
(4.91)
(0.77)
(-2.71) (-0.76) (-0.26)
LICs
OLS
HICs
OLS
LICs
OLS
HICs
OLS
Poisson
LICs
Poisson
HICs
OLS
Poisson

3.24
-0.74
-8.45
(1.69)
(-0.43) (-3.10)
0.03
-2.88
4.30
(0.03)
(-2.19)
(5.68)
2.76
(0.86)
-0.25
(-0.26)

16.15
0.87
-6.33
-16.59
(4.73)
(0.29)
(-2.31) (-3.84)
12.97
-1.01
-9.84
-1.06
(6.54) (-0.55)
(-6.37) (-0.67)
2.44
-0.07
-1.59
-0.13
(26.19) (-1.28) (-11.56) (-0.27)
Casualty Incidents with a US Target
2.75
0.96
-1.31
-6.62
(4.79)
(1.60)
(-1.90) (-4.03)
1.24
0.28
-0.35
-33.52
(14.60)
(2.85)
(-3.22)
(0.00)
0.75
-0.10
-1.20
1.23
(7.26) (-0.67)
(-4.58)
(2.29)
3.51
(3.15)
4.42
(4.63)
Q(4)
0.59
0.97
8.26
0.00
0.84
-0.64
0.00
0.31
3.66
(0.80)
3.92
(2.46)
0.97
(5.42)
4.88
0.00
0.32
4.03
0.00
0.28
3.56
(2.09)
0.75
(4.99)
1.09
(3.11)
5.11
0.00
0.00
0.82
0.00
0.00
Notes: See Table 2 for the OLS results for the WORLD sample. Column 2 refers to the estimation method; column 3 indicates the
number of lags; column 4 is pre-intervention intercept; and columns 5-8 indicate coefficient estimates. FUND denotes the rise of
fundamentalist terrorism; POST indicates the end of the Cold War; DP is a pulse dummy for 9/11; DL is a level dummy for 9/11; LR is
the long-run effect of 9/11; F is the F-statistic, and Q(4) is Ljung-Box Q-statistic using 4 lags.
TABLE 5. Summary Statistics of the Various Incident Types by Region

Series
Start
End
Mean
Variance Min Max

Mean Variance
Min Max
ALL Incident Types
West. Hem.
1992:2 2001:2
11.84
8.41
1
32
1.97
1.71
0
6
1999:2 2001:2
12.33 12.19
1
29
0.67
0.71
0
2
2001:4 2003:4
5.33
4.80
0
17
1.00
1.00
0
3
Europe
1992:2 2001:2
19.27 27.57
1 163
4.81
4.69
0
22
1999:2 2001:2
6.33
2.60
2
10
2.22
1.39
0
4
2001:4 2003:4
10.78
9.19
4
30
1.44
1.59
0
4
Eurasia
1992:2 2001:2
3.00
2.17
0
9
1.51
1.82
0
8
1999:2 2001:2
2.33
2.00
0
6
0.56
1.01
0
3
2001:4 2003:4
1.00
0.71
0
2
0.44
0.73
0
2
Africa
1992:2 2001:2
10.05
9.46
1
42
4.78
5.31
0
26
1999:2 2001:2
9.44
6.42
1
18
4.22
3.73
0
13
2001:4 2003:4
2.44
2.46
0
7
1.44
2.30
0
7
Mid. East
1992:2 2001:2
12.92
9.84
1
44
5.84
5.86
0
23
1999:2 2001:2
4.78
3.99
1
13
1.89
1.83
0
6
2001:4 2003:4
15.00
9.95
4
32
10.33
8.00
2
26
Asia
1992:2 2001:2
9.76
8.48
0
44
3.86
3.81
0
20
1999:2 2001:2
7.78
6.22
1
21
3.44
2.65
0
8
2001:4 2003:4
13.00 10.91
4
40
6.44
3.28
2
12
West. Hem.
1992:2 2001:2
6.30
6.90
0
25
0.76
1.04
0
5
1999:2 2001:2
9.22 10.91
1
25
0.44
0.53
0
1
2001:4 2003:4
3.33
3.46
0
12
0.78
0.83
0
2
Europe
1992:2 2001:2
1.59
1.26
0
4
0.35
0.48
0
1
1999:2 2001:2
1.78
1.48
0
4
0.44
0.53
0
1
2001:4 2003:4
4.67
5.00
0
13
0.22
0.44
0
1
Eurasia
1992:2 2001:2
0.49
0.65
0
2
0.16
0.44
0
2
1999:2 2001:2
0.67
0.71
0
2
0.22
0.67
0
2
2001:4 2003:4
0.44
0.73
0
2
0.22
0.67
0
2
Africa
1992:2 2001:2
2.68
3.58
0
17
1.30
2.82
0
16
1999:2 2001:2
1.78
1.64
0
4
0.44
0.53
0
1
2001:4 2003:4
1.00
1.00
0
3
0.11
0.33
0
1
Mid. East
1992:2 2001:2
2.86
2.35
0
8
0.62
0.83
0
3
1999:2 2001:2
1.33
1.58
0
5
0.33
0.50
0
1
2001:4 2003:4
7.56
4.82
2
11
4.78
4.09
0
11
Asia
1992:2 2001:2
2.41
2.58
0
11
0.76
1.06
0
3
1999:2 2001:2
2.00
1.73
0
5
0.78
1.97
0
2
2001:4 2003:4
7.56
8.40
1
29
3.11
2.32
1
7
Note: West. Hem. denotes Western Hemisphere, and Mid. East indicates Middle East. Min is the smallest
quarterly total, and Max is the largest quarterly total.
TABLE 6. OLS and Poisson Estimates of Intervention Variables by Geographic Region

DL
LR
Region
Method
Lags
c
FUND
POST
DP
ALL Incident Types
West. Hem.
OLS
1
22.57
0.22
-13.25
0.51
-5.51 -7.16
(7.40) (0.08) (-4.86)
(0.33) (-2.58)
Europe
OLS
2
18.44
5.62
-14.54
-5.40 -3.15 -5.75
(5.45) (1.47) (-2.56)
(-1.75) (-0.65)
Eurasia
Poisson
1
-0.71
0.41
1.17
-33.63 -0.74
(-2.56) (1.25)
(4.35)
(0.00) (-2.06)
Africa
OLS
2
1.97
2.33
1.89
-2.09 -4.53 -7.25
(3.44) (2.65)
(1.25)
(-2.89) (-2.46)
Mid. East
OLS
1
6.91
9.10
-7.35
-11.00 2.71
3.95
(4.40) (3.85) (-2.91)
(-3.65) (0.89)
Asia
Poisson
1
1.62
0.28
-0.22
-1.63
0.24
(23.42) (4.03) (-3.39)
(-2.28) (2.22)
West. Hem.
OLS
Europe
OLS
Poisson
Eurasia
Poisson
Africa
OLS
Mid. East
OLS
Asia
OLS
West. Hem.
OLS
Europe
OLS
Eurasia
Poisson
Africa
OLS
Mid. East
OLS
Asia
OLS
West. Hem.
OLS
Europe
OLS

2.50
0.63
-2.25
3.64
(4.55) (0.75) (-2.74)
(8.77)
2.70
0.26
-1.66
0.22
(3.53) (0.25) (-1.39)
(0.42)
1.32
0.17
-0.42
1.18
(13.62) (2.32) (-4.65)
(1.55)
-3.35
1.29
2.50
-33.03
(-3.28) (1.15)
(4.54)
(0.00)
0.92
0.99
1.10
-1.13
(3.18) (2.17)
(1.29)
(-1.59)
2.07
1.88
-1.03
-6.64
(3.66) (2.38) (-1.02)
(-3.17)
1.16
1.53
0.12
-3.37
(3.71) (2.73)
(0.19)
(-3.03)
-0.52 -1.14
(-1.06)
-0.53 -1.80
(-0.70)
-0.64
(-2.20)
-0.91
(-1.71)
-1.97 -3.08
(-1.83)
3.75
7.28
(1.69)
2.01
2.77
(1.57)

14.08 -2.18
-6.23
0.87
(6.49) (-1.11) (-3.29)
(0.79)
8.80
-0.13
-7.32
-4.35
(6.55) (-0.07) (-4.15)
(-2.85)
-1.00
-2.57
3.01
-31.42
(-2.76) (-2.47) (2.90)
(0.00)
1.01
-0.21
1.41
-0.37
(3.45) (-0.82) (2.22)
(-0.77)
3.04
0.38
-1.33
-5.25
(5.46) (0.57) (-2.21)
(-3.52)
2.92
2.26
-2.97
-7.26
(4.14) (1.94) (-2.97)
(-2.68)
-2.79 -3.20
(-1.87)
2.73
3.14
(1.76)
-0.02
(-0.03)
-1.28 -1.53
(-1.82)
3.91
5.29
(2.63)
4.66
5.17
(1.69)

1.21
0.30
-1.14
3.70
-0.07 -0.14
(4.09) (0.71) (-2.72)
(11.00) (-0.18)
1.34
0.42
-1.41
-0.23 -0.12 -0.12
(5.89) (1.40) (-4.87)
(-1.64) (-0.78)
Q(4)
0.01
0.81
0.02
0.87
0.12
0.00
0.68
0.00
0.48
0.01
0.00
0.85
0.78
0.98
0.06
0.23
0.00
0.58
0.00
0.21
0.00
0.31
0.13
0.22
0.00
0.93
1.00
0.01
0.99
0.00
0.78
0.00
0.69
0.00
0.41
0.00
0.70
Eurasia
Poisson
Africa
Poisson
Mid. East
OLS
Asia
OLS
-56.74
(-138.98)
-0.90
(-2.99)
0.52
(1.86)
0.83
(4.76)
0.00
(0.00)
-0.07
(-0.17)
-0.07
(-0.23)
0.40
(1.65)
29.30
(0.00)
1.35
(4.17)
-0.17
(-0.72)
-0.46
(-1.94)
-32.61
(0.00)
-30.76
(0.00)
-2.40
(-2.28)
-3.12
(-4.25)
0.32
(0.39)
-1.10
(-1.83)
2.56
(2.36)
2.36
(3.06)
0.93
0.19
5.79
0.06
0.56
2.35
0.00
0.91
Notes: Column 2 refers to the estimation method; column 3 indicates the number of lags; column 4 is the preintervention intercept; and columns 5-8 indicate coefficient estimates. FUND denotes the rise in fundamentalist
terrorism; POST indicates the end of the Cold War; DP is a pulse dummy for 9/11; DL is a level dummy for 9/11;
LR is the long-run effect of 9/11; F is the F-statistic, and Q(4) is Ljung-Box Q-statistic using 4 lags.
Global terrorism: deterrence versus preemption
by
Todd Sandler
School of Social Sciences
University of Texas at Dallas
tsandler@usc.edu
and
Kevin Siqueira
School of Social Sciences
siqueria@clarkson.edu
1-315-268-6609
Final Revision: January 2006
Abstract
This paper analyzes two anti-terrorism policies when a targeted nations people and property are
in jeopardy at home and abroad. A countrys deterrence decision involves both external benefits
and costs as the terrorist threat is deflected, while its preemption decision typically gives external
benefits when the threat is reduced for all potential targets. With damages limited to home
interests, a country will overdeter, while, for globalized terror, a country will underdeter.
Preemption is usually undersupplied. Leader-follower behavior is apt to lessen inefficiency for
deterrence, but worsens inefficiency for preemption as compared with simultaneous-choice
equilibrium allocations. Targeted nations can never achieve the proper counterterrorism policy
through leadership. JEL Codes: H40, D62
Keywords: transnational externalities, simultaneous choices, leader-follower, terrorism,
deterrence, preemption.
Global terrorism: deterrence versus preemption

1. Introduction
Since the Israeli-Arab conflicts of the late 1960s and beyond, transnational terrorism (i.e.,
terrorist attacks involving victims, perpetrators, or audiences from two or more countries) have
posed worldwide security concerns (Hoffman 1998) that are highlighted by the London subway
bombing on 7 July 2005, the Madrid commuter train bombing on 11 March 2004, the Bali
nightclub bombing on 12 October 2002, and the four hijackings on 11 September 2001
(henceforth, 9/11). Decentralized counterterrorism measures by autonomous national
governments to deter attacks by hardening targets at home or to preempt future terrorist actions
by annihilating the terrorists, their supporters, and resources result in transnational externalities
with diverse outcomes. Although one may jump to the conclusion that underprovision of effort
is likely to characterize such measures owing to an underlying provision of an international
public good (e.g., Lee 1988; Lee and Sandler 1989; Rosendorff and Sandler 2004), the situation
is more complex so that intuition may be misleading. The nature of externalities stemming from
counterterrorism depends on the governments payoff functions and how they account for
repercussions at home and abroad. That is, homeland security may protect not only citizens but
also foreign visitors, while such measures may jeopardize other countries assets by deflecting a
potential attack abroad. Recent empirical investigations demonstrate that defensive actions taken
by some targeted countries have transferred the attacks abroad (Enders and Sandler 1993, 2004,
2006a, b).
The purpose of this paper is to gain an understanding of countermeasure externalities
because, despite some examples of cooperation to freeze assets or to share information,
homeland security budgets and preemptive responses are still decided independently by nations
that cherish their autonomy (Sandler and Enders 2004). Consequently we may either end up in
2
an unsafe world where too little of an international public good is provided, or else in an
excessively defended one where too much is invested to shift attacks abroad. When decisions
are simultaneous, deterrence may be too much or too little compared with the social optimum,
depending on the relative magnitude of opposing deterrence-induced externalities. Preemption,
in contrast, will typically be undersupplied as compared with the social optimum. The extent of
overdeterrence or underdeterrence generally diminishes when a leader-follower equilibrium is
compared with that of simultaneous moves. Although all targeted nations benefit from a leaders
deterrence decisions, a nation is relatively better off moving second. We are interested in such
leader-follower responses because spectacular attacks at home may necessitate that a targeted
country (e.g., the United States following 9/11 or England following the subway bombings)
assume the initiative. Under these circumstances, we investigate how such positions influence
the internalization of counterterrorism externalities. Leadership typically exacerbates the
inefficient level of preemption as decisive action by one targeted country can result in a reduced
level of overall preemption when compared with the equilibrium allocation of simultaneous
actions. Deterrence often represents strategic complements where actions by targeted countries
move in unison, while preemption represents strategic substitutes where actions by targeted
countries move in opposite directions.
2. Toy game representations

Terrorism is the premeditated use, or threat of use, of extra-normal violence by individuals or
subnational organizations to obtain a political objective through intimidation or fear directed at
an audience beyond the immediate victim. Generally, a terrorist act is transnational when its
ramifications transcend the host country where the act is staged. Policies directed at thwarting
such incidents are prone to generate uncompensated interdependencies among at-risk countries,
3
because actions to address the exigency may either ameliorate the risks to all or deflect the attack
elsewhere. Astute terrorists will not only exploit the failure of governments to cooperate by
attacking the weakest link (e.g., the least-secure airport), but will also exacerbate this
noncooperative inefficiency by playing alternative targets off against one another. Globalization
heightens the risk of transnational terrorism owing to the greater mobility of terrorists, better
communication networks among terrorists, enhanced means to publicize terrorist causes, and the
greater dispersion of countries assets and people.
If one were to display the deterrence and preemption games as 2 2 normal-form
matrices, both games are apt to be a Prisoners Dilemma (PD) for the targeted nations (Arce and
Sandler 2005). This follows because the deterrence game is analogous to an arms race when
external costs dominate, with each country best off when it deters and the other does not. For
preemption, a PD is also likely owing to the public good nature of such action, where each nation
is best off when it can free ride on the other nations action. To illustrate, consider figure 1. In
panel a, a 2 2 generic deterrence game is depicted where nation 1 is the row player and nation
2 is the column player. This representation is reflective of other defensive countermeasures.
Deterrence by just nation i gives it a benefit of b at a cost of C, in which b > C so that a country
is motivated for self-defense. Moreover, passive country j endures a cost of Cj as it draws more
attacks, since it becomes a relatively softer target in light of is defensive measures. No action
by either nation gives no net gain, while mutual action provides each nation a negative payoff of
b (C + Ci), for i = 1, 2, as private and external costs overwhelm private gains. Obviously, the
dominant strategy of this PD is to deter and a Nash equilibrium of mutual deterrence with
negative payoffs results.
Alternatively, panel b of figure 1 displays the generic preemption game, where each of
4
two targeted nations can preempt or maintain the status quo. If, say, nation 1 preempts while
nation 2 does not, then nation 1 gains a net benefit of B c as it deducts its private preemption
costs of c from the public benefit of B that it receives along with nation 2. Thus, nation 2 obtains
a free-rider benefit of B in the upper right-hand cell. A reversal of roles reverses payoffs. If both
countries preempt, then each gains 2B from the cumulative action at an individual cost of c, so
that net gains are 2B c for both. Payoffs are zero from all-around inaction. The public good
dilemma is aptly captured by assuming that 2B > c > B so that acting alone is not desirable but
mutual activity is desirable. Again, a PD applies. Each countrys dominant strategy is now to do
nothing and the Nash equilibrium is mutual inaction.
The potential identity of the underlying 2 2 matrices may lead one to conclude that
these countermeasures require the same policy corrections. As our continuous-choice analysis
demonstrates, this conclusion could not be further from the truth policy implications differ
greatly for these terrorism-thwarting decisions. As the game is generalized, differences arise that
not only apply to a simultaneous-move representation, but also to a leader-follower
representation.
3. The deterrence decision

To highlight the similarities and differences between the deterrence and preemption decisions for
two countries confronting a transnational terrorist threat, we construct a single game model that
can be adapted by some parameters to represent either counterterrorism instrument. In so doing,
we limit notation. We first focus on deterrence efforts to harden potential targets.
The model involves two governments (countries) that are targeted by the same terrorist
group or network. Targeted governments are denoted by i = 1, 2. In any given period, the
terrorists can stage their attack in just a single country, known as the host country. For example,
5
al-Qaida may engage in simultaneous attacks but typically in the same country during the same
period. This assumption agrees with how most groups operate owing to limited resources. Each
country is vulnerable at home and abroad, insofar as an attack anywhere may involve residents or
foreigners. Government i first chooses its policy instrument or effort to raise the probability of a
terrorist failure at home, denoted by i . Thus, 1 i represents the probability of a terrorist
success in country i. Government i decides its expenditure level on deterrence G ( i ) , where
G ( i ) > 0 and G ( i ) > 0 . We treat the terrorist threat as exogenous and focus on the strategic
interactions between the targeted governments. The probability that government i is attacked is
given by i ( i , j ) , which for deterrence satisfy i i < 0 and 2 i i2 > 0, so that
defensive measures limit the likelihood of a home attack with diminishing returns to effort.
However, greater deterrence by country j augments the probability of an attack on country i, but
at a decreasing rate: i j > 0 and 2 i 2j < 0. Finally, country js deterrence will reduce
(increase) the marginal impact of country is action to limit the probability of being attacked
when js efforts are greater (less) than that of is efforts so that 2 i i j ! 0 as i " j .
When each countrys efforts are equal, the value of the cross partials is zero. The assumptions
on hold for i, j = 1, 2 and i j. In todays world of fundamentalist terrorists, there is always
a likelihood of attack even when both countries are heavily defended. The model, however,
captures the real-world observation that terrorists favor softer targets (Enders and Sandler 1993).
Unless otherwise indicated, we assume symmetry such that i ( i , j ) = j ( j , i ) .
The game has four alternative outcomes: the attack succeeds or fails in country i = 1, 2.
In addition to the deterrence costs that each country pays in any of these eventualities, each
country incurs costs from the attack at home or abroad as its people or property may be in harms
6
way. For simplicity, we have made payoffs symmetric, so that the costs of a failed (successful)
attack in a host country are A ( H ) , where H > A as failure limits damage to the venue country.
We use lower-case analogous symbols, a and h, for the costs to country i from a terrorist attack
failure (success) abroad, where h > a.
3.1. Government costs functions

Country is expected damage from a home attack is l ( i ) , while is expected damage from an
attack on its interests abroad is v ( j ) . This is captured in (1)-(2):
l ( i ) = i A + (1 i ) H
(1)
v ( j ) = j a + (1 j ) h.
(2)
and
Given the assumptions on the cost parameters, l(i) decreases as i increases and v(j) decreases
as j increases, because expected damages fall as terrorist failure is more imminent. Given (1)(2), the expected costs of terrorism for government i is:
Ci ( ) = G ( i ) + i l ( i ) + j v ( j ) ,
(3)
where = ( i , j ) and an interchange of the is and js would give country js costs. Country is
expected costs derive from three considerations: deterrence expenditure, attacks at home, and
attacks on is interests abroad.
The simultaneous-move equilibrium follows when country i chooses i to minimize its
expected costs, subject to the constancy of j, while country j chooses j, subject to the constancy
of i. For either country, the first-order condition requires that
Ci
= G ( i ) + i l ( i ) + l ( i ) i + v ( j ) j = 0,
i
i
i
i, j = 1, 2, and i j.
(4)
On the right-hand side of (4), the first and fourth terms represent the costs of increasing i
(coming from greater deterrence expense and the expected damage of deflecting an attack abroad
to is own interests), while the second and third terms represent the benefits of increasing i
(arising from the reduced expected costs and the smaller likelihood associated with home
attacks).1 Second-order conditions require that 2Ci i2 > 0, which we assume holds.2 Given
the presence of externalities, independent behavior by the governments are unlikely to give a
cost minimum for society at large, where CT = Ci + Cj is minimized, in which
C T = G ( i ) + G ( j ) + i ( ) l ( i ) + v ( i ) + j ( ) l ( j ) + v ( j ) .
(5)
Minimization of CT yields a Pareto optimum whose equilibrium choice variables are denoted by
* = ( * , *j ) in contrast to the simultaneous-action noncooperative solution indicated by
i
N = ( iN , N ) , which satisfies (4). The Pareto first-order conditions for minimizing CT are:
j
C T
= G ( i ) + i l ( i ) + v ( i ) + l ( i ) + v ( i ) i + l ( j ) + v ( j )

= 0,
i
i
i
(6)
and a similar expression for C T j , where the is and js are switched as compared with (6).3
The nature of the opposing externalities is clear when the noncooperative first-order
conditions are compared with those for the cooperative solution. Evaluation of the first-order
conditions for the cooperative problem at the simultaneous-move Nash equilibrium yields:
i v ( iN ) + v ( iN )
i
+ l ( N ) j 0,
j
i
i <
for i, j = 1, 2, and i j.
(7)
The first term on the left-hand side of (7) is a marginal external benefit, conferred by government
is deterrence on protecting js citizens when they are in country i. Similarly, the second left-
8
hand expression in (7) is a marginal external benefit conferred by is deterrence on country js
interests by reducing terrorist attacks in i. In contrast, the third left-hand term in (7) is a marginal
external cost that arises as is deterrence increases the likelihood of an attack in j, where js
interests are in harms way. Given the presence of opposing externalities, the net marginal
externality in (7) cannot be signed without further structure. Marginal external benefits result in
too little deterrence, whereas marginal external costs result in too much deterrence when the
simultaneous-move equilibrium levels of deterrence are compared with social-optimizing levels.
For the simultaneous deterrence decision, the slope of the governments best-response
(BR) path, which indicates the best choice of i for alternative values of j, proves instructive.
This slope is derived by implicitly differentiating Ci i in (4) with respect to j to give:
BRi
=
j
j
2 j
i
2 i
l ( i )
v ( j )
l ( i )
v ( j )
j
i
i j
i j
2Ci
i2
(8)
for i, j = 1, 2, and i j. The denominator of (8) is positive since the second-order conditions are
satisfied by assumption, so that the sign of this slope hinges on the numerator. At the symmetric
equilibrium, the numerator is positive and therefore the sign of the slope of these best-response
paths are both positive.4 As such, the countries efforts at deterrence represent strategic
complements (see Bulow, Geanakoplos, and Klemperer 1985).
4. Fully symmetric simultaneous-move case: alternative terrorist scenarios

To get some definitive results that possess some real-world analogues, we make some specific
assumptions. The outcomes for our specialized scenario provide insights for less stark examples
that may include aspects of both scenarios to varying degrees.
4.1. No collateral damage

In the first two scenarios, we assume that attacks are host-country specific with no collateral
damage on foreign interests, so that a = h = 0 and, therefore, v ( i ) = v ( i ) = 0 for i = 1, 2,
owing to symmetry. The evaluation of CT at the symmetric Nash equilibrium allocation implies:
C T ( N ) i = l ( iN ) ( j i ) > 0,
i, j = 1, 2, and i j.
(9)
Eq. (9) indicates that a country overdeters as compared with the Pareto-optimal level, because
the external costs imposed on the other country by deflecting the attack there are not taken into
account. Consequently, a deterrence race applies as each nation tries to transfer the terrorist
threat abroad where it has no interests.
Thus, the reaction of the United States to 9/11 or England to the London subway
bombings may be excessive. The seemingly uncontrollable homeland security spending in the
United States, when state and local spending is included, has this hallmark. Terrorists hurt their
targeted countries budgets in ways that transcend the carnage and destruction. Overdeterrence
bolsters these economic consequences of terrorism. Even when there is some collateral damage,
host-country losses motivate overdeterrence.
The best-response curves are displayed in figure 2 (ignoring point S) where j is on the
vertical axis and i is on the horizontal axis. These best-response paths connect the optimums of
the isocost curves (suppressed except for the dashed curve) for each country. These isocost
curves are generally hill-shaped for government i (see the dashed curve) and an inverted Cshaped for government j. Country is welfare improves on lower isocost curves, while country
js welfare improves on left-shifted isocost curves (closer to the vertical axis). This follows
because each country then experiences a smaller deterrence level abroad for any level of its own
10
deterrence, thereby making it relatively safer at home. In figure 2, the intersection of the two
reaction paths at N denotes the simultaneous-move equilibrium, where country is isocost curve
has a zero slope and js isocost curve has a vertical slope. The symmetric Pareto optimum is
some point, P, along the 45 line that is closer to the origin than point N. This is a case of
strategic complements where the deterrence choice of potential targets moves together.
4.2. Globalized terror scenario
Our second polar case is globalized terror where a countrys risk is equivalent at home and
abroad, so that A = a and H = h. This implies that a countrys expected attack costs are such that
l ( i ) = v ( j ) at the symmetric equilibrium where i = j = . Now, an evaluation of CT at the
simultaneous-move equilibrium gives:5

C T ( N ) i = i v ( N ) < 0,
i = 1, 2.
(10)
Thus, the external benefits that a countrys deterrence efforts provide to foreigners are not taken
into account and this leads to underdeterrence i.e., * > N, where subscripts are suppressed.
Although this scenario is extreme to focus our thinking, it provides insight for other
cases. In nonsymmetric cases for which a countrys citizens are at greater risks abroad owing to
excellent protection at home (e.g., the United States after 9/11), foreign-generated external
benefits and, hence, foreign underdeterrence are anticipated to dominate. As such, the downside
to successful efforts at home to deflect attacks is that a countrys citizens are then more
vulnerable abroad, where the country has little influence owing to sovereignty issues. Recent
statistical analyses have uncovered a shift in transnational terrorist incidents from Western
venues to the Middle East and Asia, where post-9/11 upgrades have not been instituted (Enders
and Sandler 2006a). This shift is particularly strong for attacks against US interests. If the
11
terrorists purposely limit the collateral damage to the host country from their attacks against, say,
Americans, then the terrorists can maximize the host countrys underdeterrence. This appears to
have been the Greek scenario with respect to its ineffective efforts to curb 17-November terrorist
activities for 22 years until a terrorist accidentally blew himself up during the summer of 2002
(Lee 1988; Wilkinson 2001). The US assistance to foreign governments one of the four
pillars of US antiterrorist policy (US Department of State 2002) is a sensible action to
address this foreign underdeterrence, but, of course, the United States can fortify only a limited
number of potential target nations. If, however, the asymmetry involves dominant costs at home
(A > a, H > h), then overdeterrence may characterize a less extreme degree of globalized
terrorism. Thus, the richness of the deterrence game is brought out.
For the fully symmetric globalized scenario, the slope of the best-response curve is
positive for both countries. Once again, we have strategic complements for the deterrence game,
but the isocost curves are now U-shaped and C-shaped for country i and j, respectively.
Moreover, the Pareto optimum (not displayed for this case) is on the 45 line above the
simultaneous-move equilibrium N in figure 2. The discussion above establishes:
Proposition 1. In the case of no collateral damage, each noncooperative target government

overdeters relative to the Pareto-optimal level; in the case of globalized terror, each
noncooperative target government undeters relative to the Pareto-optimal level.
5. Preemption game
In the preemption game, the targeted government (i = 1, 2) must independently decide whether to
launch an attack against a terrorist group or its sponsor. Although the preemption game bears
great similarities to the deterrence game, the former displays some subtle but important
12
differences. First, preemption confers public benefits on targeted countries, while deterrence
confers public costs and benefits on targeted countries. Second, a corner solution may
characterize preemption as only one government (i.e., the prime target) takes action. In contrast,
all targeted governments will take deterrent measures so that a corner solution is not
economically relevant. Third, with preemption, a fanatical terrorist group may be kept from
attacking if the governments actions sufficiently deplete a groups capabilities. Other
differences will be noted in the ensuing analysis.
We utilize the same notation as before, but G ( i ) now denotes preemption costs. All of
the other parameters e.g., l ( i ) , v ( i ) , A, H, a, and h have analogous interpretations as those
in the deterrence game. The essential difference in parameters involves the probability that
country i will be attacked, as given by i ( ) . An increase in is preemption reduces this
probability not only for country i but also for j i.e., i i < 0 and j i < 0 with
diminishing returns to effort. This second inequality is a key difference between preemption and
deterrence. A second associated difference is the unambiguous sign of the cross partial i.e.,
2 i i j > 0 which indicates that js preemption reduces the marginal impact of is

preemptive efforts owing to diminishing returns. Collective preemption may be sufficient to
eliminate all attacks, where 0 = 1 1 2 is the governments perceived likelihood of no
attack.6
The first-order conditions characterizing the Nash equilibrium of the preemption game
played between two targeted countries are identical in form to that in (4), and are not displayed
here. Now, G ( i ) denotes the marginal preemption costs and the remaining three terms
represent marginal benefits either conferred at home or abroad. Unlike deterrence with opposing
13
externalities, preemption reduces vulnerabilities in all potential target countries by curbing
terrorists capabilities. Because all externalities are positive, best-response paths and outcomes
are easier to sign.
In figure 3, government is isocost curves are U-shaped (see IiIi), while government js
isocost curves (see IjIj) are translated through 90. For i, higher isocost curves indicate a greater
well-being, since each level of is preemption is associated with a higher preemption by the other
country. Similarly, isocost curves to the right represent greater well-being for country j. Based
on the assumptions, the thickened best-response curves (BRi and BRj) are negatively sloped,
indicative of the public good nature of preemption. BRi joins the zero slopes of the isocost
contours for i, while BRj joins the vertical slopes of the isocost contours for j. These negatively
sloped best-response paths are also consistent with the preemption decisions of the governments
being strategic substitutes. The simultaneous-move equilibrium occurs at N.
5.1. Noncooperative versus cooperative behavior: alternative scenarios
By evaluating the first-order conditions for minimizing CT at the symmetric, Nash equilibrium
allocation of the simultaneous-move preemption game, we find that C T ( N ) i is negative in
any scenario. This comparison leads to the following result:
Proposition 2. For all cases, the simultaneous-move equilibrium allocation results in a smaller
level of preemption by both targeted governments, compared with the Pareto optimum.
Proof: See Appendix
Both polar scenarios now lead to the same outcome. The extent of underpreemption will be
14
greater in the globalized terror instance because there are a couple sources of external benefits in
contrast to the single source for no collateral damage. Less extreme cases would also result in
too little preemption. The situation is displayed in figure 3, where the cross-hatched region,
defined by the governments isocost curves through N, denotes Pareto-improvement allocations
for preemption. The symmetric Pareto optimum, P, is located somewhere in this region on the
45 line.
These results generalize to n target countries. In an asymmetric world where some
countrys interests are the preferred targets of the terrorists, the country is motivated to preempt
despite the free ride given to others. For example, US interests are the target of 40% of the
transnational terrorist attacks; its war on terror embodies its preemptive effort (Sandler and
Enders 2004).
6. Stackelberg leader-follower in the deterrence game
Although a leader-follower representation is often of interest because there is an issue of

coordination, signaling, or commitment, we choose to use this framework to ascertain if there is
a possibility for the externalities to be internalized by one nation moving first. There has been
little evidence either before or after 9/11 that nations coordinate their deterrence or preemption
decisions (Sandler 2003). In a world where some countries interests are the preferred target of
terrorists, these countries will heavily invest in intelligence and antiterrorist measures. With
their greater risks, such targeted countries may have little political choice but to assume a
leadership role by deciding their deterrence prior to other targeted countries. Since 9/11, the
United States has been more aggressive than other countries in bolstering antiterrorist measures,
as reflected in the tens of billions of dollars of extra security spending. Currently, the United
States is considering installing defensive measures against surface-to-air missiles on commercial
15
planes. Thus, we first investigate the allocative implications if a past attack forces a government
to assume a leadership position in terms of defensive measures.
Country i is assumed to be the leader and country j the follower. As the leader, i
minimizes its costs, taking into account the impact that its deterrence decision will have on js
choice of deterrence. That is, country i will choose i to minimize its deterrence costs, while
treating j as dependent on its i according to js best-response path, so that j = BRj(i). The
leaders cost function is:
Ci i , BR j ( i ) = G ( i ) + i i , BR j ( i ) l ( i ) + j i , BR j ( i ) v BR j ( i ) .
(11)
Differentiating (11) with respect to i, we derive the leaders first-order condition,

CiS
i
= G ( i ) + i l ( i ) + l ( i )
+ v ( j )
BR j
j
j
i
+ l ( i ) + v ( j ) + v ( j ) j = 0, (12)
i
j
j
i
where the superscript S on Ci denotes Stackelberg or leader-follower equilibrium allocation. In

(12), the first bracketed expression consists of the same terms as in the simultaneous-move firstorder conditions, while the second bracketed expression, which is multiplied by the slope of
country js reaction path, distinguishes the leaders behavior from that in a noncooperative (N)
simultaneous-move game. That is, when (12) is evaluated at N = ( iN , N ) , the first bracketed
j
term equals zero, leaving the second composite expression as the determinant of the relationship
of the leader-follower equilibrium allocation to that in the Nash simultaneous-move game. The
terms in the second bracketed expression are the marginal external benefits and costs that j
imposes on i from not cooperating [see (7)]. Even if the slope of the best-response path is
positive, the net influence of this expression cannot be evaluated unless additional structure is
placed on the problem.
16
6.1. Alternative scenarios: simultaneous-move versus Stackelberg equilibrium allocation
If there is no collateral damage beyond the host countrys interests, so that the v expressions are
zero, then the evaluation of the leaders Stackelberg first-order condition at the symmetric
simultaneous-move equilibrium gives:
CiS ( N )
i
BR j
= l ( iN ) i
> 0.
j i
(13)
This sign follows because i j > 0 (from deflecting the attack abroad) and the positive slope
of js reaction path. This inequality indicates that the leader internalizes some of the marginal
external costs from deflecting the attack. This partial internalization arises as the leader accounts
for the strategic complementarity, in which overdeterrence on its part leads the follower to
overdeter in response. To reduce the reciprocal external costs, the leader curtails its deterrence,
an action that induces a similar response by the follower. As a consequence, N ! S where
S = ( S , Sj ) . Leader-follower behavior limits overdeterrence when the Stackelberg outcome is
i
compared with the simultaneous-move equilibrium. This can be seen in figure 2, presented
earlier, where leader is dashed isocost curve is tangent to js best-response curve at the leaderfollower equilibrium S.7 The isocost curves associated with S imply that both countries are better
off than at N owing to the curtailment of the deterrence race. Because the followers isocost
curve necessarily shifts left by more than the leaders isocost curve shifts down, there is a
second-mover advantage that a prime-target country relinquishes out of political necessity to act
first. The 9/11 attacks have imposed a strategic disadvantage on the United States by making it
assume a deterrence leadership role; nevertheless, the United States makes some gain by seizing
the initiative.
In the globalized scenario, a similar internalization occurs. An evaluation of the leaders
17
Stackelberg first-order conditions at the symmetric simultaneous-move equilibrium allocation
implies that the leader internalizes some of the marginal external benefits that stem from the
strategic complementarity. In particular, the leader increases its level of deterrence, because
such efforts induce a greater deterrence by the follower, which safeguards the leaders interests
on the latters soil. As compared with the underdeterrence associated with simultaneous moves,
both the leaders and followers deterrence levels are greater, so that S ! N . In figure 2, the
leader-follower solution is up along BRj to the right of N at S where one of the leaders U-shaped
isocost curves (not shown) is tangent to js best-response path. Once again, both governments
gain from leadership by one of the targeted countries, but the follower has a second-mover
advantage. In summary, we have:
Proposition 3. For either no collateral damage or globalized terrorism, the equilibrium allocation
in the leader-follower game results in deterrence levels that are closer to the social optimum,
compared with those of the simultaneous-move outcome. The follower, however, gains relative
to the leader.
6.2. Leader-follower and preemption

Given the unidirectional externalities in the preemption situation, the evaluation of the impact of
leader-follower behavior is simple to ascertain. An evaluation of the leader-follower first-order
condition at the simultaneous-move equilibrium of the preemption game gives:
Proposition 4. The leader decreases its preemption efforts relative to the simultaneous-move
equilibrium. Moreover, total preemption for the leader-follower allocation is less than that for a
18
unique (interior) simultaneous-move equilibrium.
Proof: See Appendix
At an interior solution, the leader reduces its preemption because it foresees that this reduction
will induce the follower to provide more. This action improves the leaders well-being at the
expense of the follower. Unlike deterrence, taking the initiative is not Pareto improving.
In figure 3 (displayed earlier), the leader-follower equilibrium at S will be northwest
along the followers best-response path. The aggregate leader-follower level of preemption must
decrease as compared with the unique simultaneous-move equilibrium N, given that the slope of
BRj is greater than 1. All terrorist scenarios no collateral damage, globalized terror, or some
combination give this outcome. If there is a corner solution where BRi is everywhere above
BRj, then the leader-follower solution is at the i intercept of the BRi reaction path where i does
all of the preemption and j free rides. In this case, leadership has no influence on the outcome.
With an attack like 9/11, the host countrys best-response curve may shift sufficiently to the
northeast that a corner solution results where one or two most impacted countries do virtually all
of the preempting e.g., post-9/11 actions of the United States and the United Kingdom in
Afghanistan.
7. Policy implications and concluding remarks

Although deterrence and preemption games are almost identical in structure, they possess some
essential differences that influence the conduct of sensible and effective counterterrorism policy.
For the deterrence game, the mix of home and abroad risks imply both external benefits and
costs, which, in turn, can yield a wide variety of outcomes. Thus, noncooperating nations may
overdeter if host-country risks outweigh threats to a countrys citizens while abroad. If,
19
however, terrorism is globalized, placing citizens equally in harms way everywhere, then
underdeterrence is the outcome. Because only external benefits are typically generated for
preemption, too little action is the norm so that policy must bolster this measure.
In the absence of a corner solution, less global preemption will result from leadership so
that the Bush doctrine of 2002 will limit the overall level of preemption, opposite to the
doctrines intention. This result follows because preemption is purely public to potential targets
of transnational terrorism, thus allowing the leader to reduce its efforts by more than the follower
increases its efforts. After 9/11, there were some countries most notably, the United Kingdom
that followed the US invasion of Afghanistan, so that a corner solution did not apply. For these
follower countries, US leadership is anticipated to have increased their participation level,
consistent with the administrations wishes. Prime-target countries confront a real policy
dilemma because preemption leadership shows its citizens that it is decisive, but at the risk of
reducing overall efforts. As such, political realities lead to the wrong policy choice. When,
however, deterrence decisions are considered, leadership is apt to limit the inefficiency
whether there is underdeterrence or overdeterrence. Thus, leadership is apt to be helpful for
deterrence but not for preemption. This policy insight does not fully concur with the Bush
administrations current actions.
As fundamentalist terrorist drive for ever-greater atrocities, they motivate leadership in a
small set of prime-target nations e.g., the United States, the United Kingdom, Israel, and Spain.
What our analysis highlights is that leadership, without true cooperation, is a two-edged sword
for the practice of counterterrorism: leadership curbs inappropriate deterrence levels but
exacerbates inappropriate preemption levels. Given the diverse strategic character of deterrence
and preemption decisions, nations can never get the mix correct through leadership, induced by
large-scale terrorist attacks. The only solution is the creation of a cooperative network of nations
20
with integrated counterterrorist measures. We are nowhere near this goal (Enders and Sandler
2006b).
Our models abstract by assuming just two targeted nations. This abstraction is
appropriate because an individual nation views its actions vis--vis the collective target of the
rest of the world. In the case of the United States, the rest of the world (in terms of targeted
countries) is a collective player roughly of similar size. For a small country, the rest of the world
overshadows it, so that a corner solution where it does no preemption of transnational terrorism
is likely. In our future work, we are examining the mix between deterrence and preemption.
This mix greatly complicates the analysis, which is best understood by first having these policies
examined in isolation, as done here.
21
Appendix
Proof of Proposition 2.
We evaluate the first-order conditions for minimizing CT at the symmetric Nash equilibrium of
the simultaneous-move preemption game. This gives
CT ( N )
i
= i v ( iN ) + v ( iN )
i
+ l ( iN ) j < 0 for i, j = 1, 2, and i j.
i
i
(A1)
For the no collateral damage case where v = v = 0 and for the globalized terror case where
v ( ) = l ( ) , there is too little preemption at the Nash equilibrium allocation compared with the
Pareto optimum, so that all terms to the left of inequality are negative.
Proof of Proposition 4.
To compare the interior of Stackelberg equilibrium allocation to that of the simultaneous-move
preemption game, we evaluate the first-order conditions charactering leader-follower behavior at
N :
CiS ( N )
i
BR j
= l ( iN ) i + j v ( N ) + v ( N ) j
> 0.
j
j
j
j i
(A2)
In (A2), all terms in the brackets are negative and the slope of the followers best-response path
is also negative; hence, the product of these expressions is positive for all scenarios. The sign in
(A2) indicates that the leader will preempt to a smaller extent than at the simultaneous-move
equilibrium. The follower will then increase its preemption, but since the slope of BRj is less
than one in absolute value to ensure uniqueness and existence of equilibrium (Cornes, Hartley,
and Sandler 1999), the overall value of preemption falls relative to the simultaneous-choice
equilibrium.
22
References
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in public goods models: an elementary proof via contraction, Journal of Public
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Economics 37, 80529
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(2004) What do we know about the substitution effect in transnational terrorism?, in
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Frank Cass)
(2006a) Distribution of transnational terrorism among countries by income classes and
geography after 9/11,International Studies Quarterly 50, forthcoming
(2006b) The Political Economy of Terrorism (Cambridge: Cambridge University Press)
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(2000) The macrotechnology of conflict, Journal of Conflict Resolution 44, 77392.
Hoffman, Bruce (1998) Inside Terrorism (New York: Columbia University Press)
Lee, Dwight R. (1988) Free riding and paid riding in the fight against terrorism, American
Economic Review Papers and Proceedings 78, 226
23
Lee, Dwight R., and Todd Sandler (1989) On the optimal retaliation against terrorists: the paidrider option, Public Choice 62, 14152
Rosendorff, B. Peter, and Todd Sandler (2004) Too much of a good thing? The proactive
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European Journal of Political Economy 20, 30116
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Frank Cass)
24
Footnotes
Sandler is an Endowed Professor of Economics and International Political Economy, and

Siqueira is an Associate Professor. This research was partially supported by the United States
Department of Homeland Security (DHS) through the Center for Risk and Economic Analysis of
Terrorism Events (CREATE) at the University of Southern California, grant number EMW2004-GR-0112. Any opinions, findings, and conclusions or recommendations are solely those of
the authors and do not necessarily reflect the DHS. The authors gratefully acknowledge helpful
comments provided by Miguel Costa-Gomes and Gianni De Fraja following presentation of an
earlier version of this paper at the University of York, UK. Helpful comments were also
provided by a referee.
1. Although a corner solution is technically interesting, it is not economically
meaningful. Terrorism-prone countries do not choose zero deterrence levels; every country with
airports have installed metal detectors.
2. The second-order condition requires that
2
2Ci
2
( i ) + 2l ( i ) i + l ( i ) 2i + v ( j ) 2 j > 0.
=G
i2
i
i
i
This condition will hold if the probability function consistent with our assumption on i is of the
following specific form:
i =
j
i + j
, i, j = 1, 2, and i j.
A countrys perceived likelihood of a terrorist attack hinges on the other targets relative
deterrent measures. This attack probability function is similar but different than contest success
functions in the conflict literature, where success hinges on the ratio of own effort to total effort
(Hirshleifer 1989, 2000).
25
3. We assume that the second-order condition for the cooperative minimization problem
is satisfied. A sufficient condition for this to hold is that the principal minors of the Hessian
matrix are strictly positive:
2C T
2C T 2C T 2C T
> 0 and
i2
i2 2 i j
j
> 0.
For the specific probability function assumed in footnote 2, this condition holds.
4. In (8), the first two terms in the numerator are positive, while the last two terms will
be of differing signs. The sum of these last two terms will, however, be zero when i = j
because cross partials are then zero.
5. This follows since i i = j i .
6. The following specific forms for the attack probabilities would give such results:
i =
j0
i + j + i 0 + j 0
for i, j = 1, 2, i j
and
0 =
i + j
i + j + i 0 + j 0
In these equations, i 0 and j 0 are proxies for some kind of obstacle that protects country i and j,
respectively. An increase in i 0 reduces the likelihood of i being attacked, but increases the
likelihood that country j is targeted. The need for a different underlying specific probability
function is another difference between the two models.
7. Our problems are similar to some of the social dilemmas analyzed in the excellent
article by Eaton (2004). Some important differences exist because deterrence has opposing
externalities.
nation 2
Status quo
Status quo
Deter
0, 0
C1, b C
b C, C2
b C C1, b C C2
nation 1
Deter
a. 2 2 Generic deterrence game
(C + Ci > b > C), i = 1, 2
nation 2
Preempt
Preempt
2B c, 2B c
Status quo
B c, B
nation 1
Status quo
B, B c
b. 2 2 Generic preemption game
0, 0
(2B > c > B)
Figure 1. Preemption and deterrence games in normal form
BRi
N
S
S'
BRj
45
i
Figure 2. Best-response paths for symmetric deterrence game
Ij
Ii
Ii
N
BRj
45
0
Ij
BRi
Figure 3. Symmetric preemption best-response paths
Terrorist backlash, terrorism mitigation, and policy delegation

Kevin Siqueira*
and
Todd Sandler
School of Economic, Political and Policy Sciences
2601 N Floyd Road
Richardson, TX 75083 USA
1-972-883-6725
fax: 1-972-883-6297
January 2007
Abstract
This paper presents a three-stage proactive game involving terrorists, elected policymakers, and
voters. In each of two targeted countries, a representative voter chooses an elected policymaker,
charged with deciding proactive countermeasures to ameliorate a transnational terrorist threat.
Two primary considerations drive the voters strategic choice: free riding on the other countries
countermeasures and limiting a reprisal terrorist attack. The resulting low proactive
countermeasures benefit the terrorists, whose attacks successfully exploit voters strategic
actions. This finding stems from a delegation problem where leadership by voters has a
detrimental consequence on the well-being of targeted countries. Domestic politics add another
layer of concern when addressing a common terrorist threat.
JEL classification: H41, D72, H56, D74
Keywords: Terrorism; Delegation problem; Counterterrorism; Public Goods; Three-stage game
email address: siqueira@utdallas.edu (K. Siqueira), tsandler@utdallas.edu (T. Sandler)
Corresponding Author: Sandler
*Siqueira is an Associate Professor of Economics. Sandler is the Vibhooti Shukla Professor of
Economics and Political Economy. We have profited from the comments of two anonymous
references. This research was partially supported by the U.S. Department of Homeland Security
through the Center for Risk and Economic Analysis of Terrorism Events (CREATE) at the
University of Southern California, grant number N00014-05-0630. However, any opinions,
findings, and conclusions or recommendations are solely those of the authors and do not
necessarily reflect the views of the Department of Homeland Security.
Terror backlash, terrorism mitigation, and policy delegation

1. Introduction
The unprecedented and destructive terrorist attacks on September 11, 2001 (hereafter 9/11) not
only had economic ramifications but also political consequences, felt across the globe. Estimates
of economic losses run from $80 to $90 billion, not including increased expenditures on
homeland security and other indirect costs that followed in the wake of these attacks (Kunreuther
and Michel-Kerjan, 2004; Kunreuther et al., 2003). To maintain political support from the
American public, the Bush administration had to demonstrate its ability to take decisive actions
to protect US people and property from future attacks. These measures took two tracks:
defensive responses in the form of greatly expanded homeland security and offensive responses
in the form of the Afghan invasion on October 7, 2001. The latter was intended to destroy alQaidas assets and send a clear message that such terrorist attacks will elicit a massive and
prolonged retaliatory blow against the terrorists, their associates (i.e., Abu Sayyaf in the
Philippines), and their supporters (i.e., the Taliban who had provided a safe haven).
As a targeted government takes stringent proactive measures against terrorists and their
sponsors, the government must also worry about a potential backlash that these efforts might
trigger at home by another terrorist group that objects to Draconian countermeasures. For
example, Spains support of the US-led war on terror, including its participation in
Afghanistan and Iraq, resulted in the March 11, 2004 (hereafter 3/11) Madrid commuter train
bombings, which killed 191 and injured 1,200. Spanish voters viewed the ruling Partido
Popular partys strong stance against al-Qaida as having brought this backlash attack to the
homeland a belief bolstered by the statements by the perpetrators. The governments
culpability was exacerbated by its false accusation of Euskadi ta Askatasuna (ETA). Similarly,
Britains close alliance with US post-9/11 proactive efforts likely resulted in the London subway
2
and bus bombings on July 7, 2005 and a subsequent failed attack four weeks later. As with
Spain, proactive measures against al-Qaida caused another sympathetic group to retaliate on the
retaliators home turf. A series of terrorist attacks in Saudi Arabia during 2004-2005 appears
motivated by its cooperation in US-led antiterrorism efforts against al-Qaida. After 9/11, Abu
Sayyafs attacks in the Philippines followed a similar backlash motivation.
Thus, a strong proactive response presents a dilemma for politicians and the electorate in
a liberal democracy. If a targeted government pursues rigorous antiterrorist policies that curtail
the general threat at home and abroad, these efforts may trigger a backlash that leads to a direct
attack at home.1 This is illustrated by Osama bin Laden threatened attacks on American soil in
retaliation for US actions in early 2006 to kill al-Qaida leaders (e.g., Ayman al Zawahiri).
However, a failure to address the general threat of terrorism also leaves the country vulnerable to
attacks at home and abroad. Hence, any response retaliation or inaction has negative
consequences that must be balanced. This dilemma is further complicated in the case of a
common transnational terrorist threat confronting two or more countries, insofar as each
countrys action has strategic implications on the other countries response.
The purpose of this article is to investigate proactive counterterrorism measures when
voters delegate such policy choices to elected officials in two countries facing a common
terrorist threat.2 The underlying game involves terrorists, elected officials, and voters. Unlike
the literature, our representation accounts for the strategic aspects of domestic politics, associated
with offensive countermeasures against a transnational terrorist threat. Previous analyses
focused on just two-player games with the targeted countries policymakers as the strategic
players.3 The inclusion of voters allows us not only to investigate the delegation problem, where
voters rely on elected officials to represent their preferences, but also to account for the
grievance aspect of proactive policies.4 We establish that voters are inclined to restrict offensive
3
operations. In particular, voters may strategically elect a government that places a low priority
on meeting the general terrorism threat so as to minimize backlash attacks while obtaining a free
ride on the efforts of another targeted nation. This strategizing on the part of voters results in a
Pareto-inferior level of proactive countermeasures than in the absence of delegation. Thus,
terrorist attacks can make targeted countries work against one another by inducing constituencies
to elect candidates who are soft on terrorism. If, however, the terrorists were only to target a
single country, then this adverse delegation problem is absent, because there is no other target to
provide a terrorist counteroffensive or to draw an attack. Our analysis shows that confronting a
common transnational terrorist threat is especially difficult in democracies.
The remainder of the paper contains four sections. Section 2 provides background and a
justification for the games structure. In Section 3, stage 2 and 3 of the three-stage game are
analyzed. Section 4 solves the all-important first stage where farsighted voters assume a
leadership role over the officials whom they elect. Section 5 indicates concluding remarks and
policy implications.
2. The underlying game: background and justification

To capture domestic politics and policy choice, we focus on the problem of delegation where
voters choose elected officials or policymakers in two terrorism-threatened democratic countries.
These policymakers must then decide proactive measures to mitigate future attacks from a
common terrorist threat from group A. Today, group A could be al-Qaida, while, in the 1980s, it
would have been the Abu Nidal Organization (ANO) or Islamic Jihad. Proactive responses
e.g., infiltrating a terrorist group, attacking terrorist training camps, or assassinating or capturing
terrorists represent a privately provided pure public good problem, because such actions come
at a private cost to the provider nation and generate nonexcludable and nonrival benefits to all at-
4
risk countries. We also recognize that enhanced offensive actions also increase the likelihood of
being attacked by another group, denoted by group B, that objects to the counteroffensive. For
example, Israeli retaliatory actions against the Palestine Liberation Organization (PLO) and
Black September at home and abroad led to more militant groups e.g., the Popular Front for the
Liberation of Palestine (PFLP) and ANO that frequently staged attacks to protest Israeli
actions. Hamas is a particularly apropos example of group B, since it retaliates against Israeli
responses and does so within Israel. Recent Israeli crackdowns on Fatah and Hezbollah incited
Hamas attacks.
Since 9/11, countries in the US-led coalition (e.g., Great Britain, Spain, Australia, the
Philippines, and Turkey) endured attacks at home from terrorists aligned or sympathetic to alQaida. The loosely tied al-Qaida network nicely fits the scenario of our model where pressures
on al-Qaida can erupt in another group launching an attack on the countrys home soil. The
country that draws the attack is often the one that is perceived to have acted more heavyhandedly than other countries,5 which fits the London bombings in the summer of 2005. Our
game representation captures several aspects of the proactive dilemma associated with
transnational terrorism: namely, the free-riding incentive, the backlash risk, and the delegation
problem. The latter arises because voters have an incentive to strategically elect a government
that puts less weight on the general terrorism threat in the hopes of shifting abroad more of the
offensive response, thereby putting more backlash risk on the other country. As such, an
electorate can influence the game subsequently played by the countries policymakers as they
enact counterterrorism measures. If, for example, voters are more concerned about the
retaliatory attacks than about the general threat, then they will choose a dovish policymaker.
This strategic vote can result in less action by both countries and a greater general terrorism
threat.6 Consequently, voters may be worse off than had they not acted strategically.
2.1. The players and the timing of the game

The game involves three different sets of players: voters, policymakers, and terrorists. Although
terrorists do not act strategically in our model and respond only to the actions taken by the two
countries, each terrorist group represents a particular type of threat to each country. Terrorist
group A poses a general threat to two countries whose people and properties can be targeted at
home and abroad. In addition, terrorist group B hits a proactive country at home with a
retaliatory attack, meant to display its displeasure and grievance at the county whose
countermeasures are viewed as more stringent. In each targeted country, a second set of players
consists of elected policymakers who decide countermeasures against group A in order to
minimize the expected damages from possible terrorist attacks in addition to minimizing the cost
of implementing the associated policy. The third set of players is the countries voters who share
the same objectives as elected policymakers. In each country, we assume that voters and
policymakers only differ in the weight that they place on the threat of experiencing a backlash
attack at home, stemming from their actions to curb the general terrorism threat. To simplify and
abstract from the complex political process associated with two democratic countries, we focus
on a representative voter from a majority group that dominates the process and is decisive in
determining the election of political candidates and, thus, policy alternatives.
The timing of the game is as follows: In stage 1, the voters in each targeted country
simultaneously elect a policymaker who then decides a proactive response to group A in stage 2.
This response is decided in a noncooperative fashion even though both governments are
confronted by a common threat. Given the reluctance of most governments to coordinate their
security policies, this is an appropriate assumption. We assume that voters and governments
know the terrorists preferences but are unsure about their propensity to engage in terrorist acts.
6
In stage 3, terrorist group A decides the nature of its campaign against the two countries. As a
potential reaction to government countermeasures, terrorist group B surfaces and attacks the
heavier-handed country. We employ the subgame perfection solution concept and thus solve the
game backwards starting with the terrorist campaigns in stage 3, moving to the choices of the
policymakers in stage 2, and ending with the voters election of the policymakers in stage 1.
3. Stage 2 and 3 of the game: counterterrorism and terrorism

As motivated by our discussion in Section 2, we first examine the general threat posed by group
A in stage 3 as it decides whether to conduct its terror campaign against countries 1 and 2, based
on the countermeasures (i , i = 1, 2 ) taken by the two countries. To capture the public good
nature of government actions at curbing the terrorist threat, we let g (1 + 2 ) represent the
probability of a terrorist campaign failure and 1 g (1 + 2 ) denote the probability of a terrorist
campaign success. The probability of failure function is strictly increasing and concave in the
cumulative countermeasures of the targeted governments, so that g > 0 and g < 0. The
campaign can result in failure (a miss) with payoff m or a success (a hit) with payoff h. Any
expected gains from As campaign must be at least as large as the benefit, b, of delaying the
campaign and pursuing the best alternative nonterrorist activity. Thus, the terrorist group will
engage in its campaign against both countries provided that the following inequality holds:
g ( ) m + 1 g ( ) h + b,
(1)
where = 1 + 2 , h > m, and represents As predisposition to waging its terror campaign.

For simplicity, is assumed to be uniformly distributed on the interval [ , ] . Because group
As predisposition is unknown to voters and their elected officials, As campaign likelihood, p, is
7
viewed as a random event. Given our assumptions, the voters and officials perceived
probability of a terror campaign is given by,7
1 1
p (1 , 2 ) = 1 {b g ( ) m [1 g ()h ]} ,
2
(2)
which is itself dependent on the two governments countermeasures. Performing comparative

statics on (2), we obtain,
g
p
p
=
=
( m h ) < 0,
1 2 2
(3)
so that the probability that group A engages in a terror campaign decreases as either country
exerts more antiterrorist efforts. These marginal probabilities are themselves increasing in the
actions of either country:
g
2 p 2 p
2 p
2 p
=
=
=
=
( m h ) > 0.
2
2
1
2
1 2 2 1 2
(4)
Next, we turn to group B which, as discussed earlier, attacks as a protest to the

countermeasures levied by one of the countries on group A. The voters and policymakers
evaluate the threat that their country could be attacked by B to be a function of the relative
differences between the effort levels expended by the two countries in countering the general
terrorist threat. Each government or its designated policymaker assumes that country 1 will be
attacked if 1 + 2 , where > 0 represents Bs bias against government 1. This bias could be
the result of Bs accumulated past grievances built up over the years. This random variable is
assumed to be uniformly distributed on the interval [ , ] . Given the timing of the game, is
unknown to the voters and policymakers in stage 1 and 2 when they make their decisions. We,
thus, let the perceived probability, 1 , that B attacks country 1 to be given by:
1 (1 , 2 ) = ( 2 1 ) . Since the distribution of is uniform, we have:8
8
1
1 (1 , 2 ) = 1 ( 2 1 ) ,
2
(5)
so that 2 = 1 1 is the probability that B retaliates against country 2. From (5), we have:
1 2
1
=
= 1 = 2 =
> 0.
1 2
2
1 2
(6)
Thus, country is risk from a backlash attack increases with its own countermeasures and
decreases with those of the other country. All second-order partials are zero since the first-order
partials are independent of the i s.
Terrorist group B may arise out of an ethnic, religious, or political community, common
to both countries e.g., the suicide bombers in London on July 7, 2005 were Islamic
fundamentalists with beliefs aligned with al-Qaida. Russian offensives against terrorists and
insurgents in Chechnya resulted in Chechen terrorists staging missions in Russia, including the
bombings of two Moscow apartment buildings (September 9 and 13, 1999) and the barricade and
hostage seizure of a Moscow theater (October 23, 2002). In addition, the terrorists behind the
3/11 Madrid train bombings shared religious and ethnic affinities with al-Qaida. Increases in
security against terrorism are apt to be directed in part against those interests identified with a
particular terrorist threat at home and abroad. This may then result in grievances among
sympathetic elements at home that erupt into a new group demonstrating its displeasure,
especially when the countrys measures appear particularly harsh relative to the other targeted
country.
3.1. Elected policymakers counterterrorism response: stage 2
We now fold the game back to stage 2 where an elected policymaker in each of the two targeted
countries decides the proactive response, while taking its counterparts response as given. To
9
represent the policymakers objective function, we must first indicate country is damage and
likelihood in four scenarios, given the presence of a general terrorist threat from group A and
localized threat from group B. Dii represents the damage to country i when group A directs
attacks at is interests at home and abroad, while group B stages protest attacks at home. The
likelihood of this scenario is p i , where p and i have been previously defined. If, however,
group A attacks is interests at home and abroad, but B retaliates against j (i.e., the other country),
then Dij denotes the damage to i and occurs with probability p (1 i ) . Given that the first
scenario involves additional attacks than the second scenario, it is reasonable to assume
Dii > Dij . The third and fourth scenario involve no general threat from group A to country i. In
the third scenario, country i endures attacks from group B at home, resulting in damage dii with
probability (1 p) i . Clearly, Dii > dii since Dii also involves losses from attacks by group A at
home and abroad. Finally, the fourth case involves country i experiencing no attacks from either
terrorist group so that damage, d ij , is zero with a probability of (1 p )(1 i ) .9 Similarly, we
can define four scenarios for country j where D jj > D ji , D jj > d jj , and d ji = 0.
In each targeted country, the elected policymaker chooses its proactive response
(i , i = 1, 2 ) , taking its counterparts policy as given while anticipating the consequences of its
choice on the probabilities that it is attacked by group A or B or both. The policymakers
objective is to minimize the sum of its expected damages from the four scenarios and the costs of
its countermeasures, C (i ) . The cost function is assumed to be strictly increasing and convex in
i . As a special feature of the expected damages from attacks, a weight of ig is applied by the
elected policymaker to Dii , which reflects damages from attacks by groups A and B on is soil.
10
The weight is also applied to dii . This weight captures a policymakers aversion to policyinduced terrorist attacks on home soil. As such, the proactive choice in country i is also
influenced by ig , which varies along the unit interval, [ 0,1] . An elected policymaker in stage 2
chooses i , taking j as given, to
minimize Z ig = p i ig Dii + p (1 i ) Dij + (1 p ) i ig dii + C (i ) ,
(7)
where the arguments of p and i are suppressed. The associated first-order condition, after
rearrangement, is:
p
i ig ( Dii d ii ) + (1 i ) Dij + i p ( ig Dii Dij ) + (1 p ) ig d ii + C = 0.
i
i
(8)
The second-order condition associated with (7) is assumed to hold.10

Given that the sign of the first expression in brackets in (8) is positive, the first composite
expression in (8) is negative (recall that p i < 0 ) and captures is added benefits from
reducing the likelihood that group A will initiate its terror campaign owing to greater proactive
measures. The sign of the second expression in (8) is ambiguous and hinges, in large parts, on
ig or the potential distaste placed by the policymaker on a backlash attack launched by group B
to protest actions taken against group A. If this weight is close to zero so that backlash losses are
greatly discounted, then the second expression in (8) may be negative and represents an
additional marginal benefit from proactive measures. In this scenario, the policymaker places
more weight on shifting the retaliatory attack abroad than on the damage sustained at home. Of
course, C denotes the marginal provision cost of the proactive measure. A second relevant
scenario involves ig with values near one. When this occurs, the sign of the second bracketed
expression will be unequivocally positive if ig Dii > Dij , since the dii term is positive.11 This
scenario means that the second expression in (8) represents an additional (proactive) marginal
11
cost coming from the backlash consequence. Scenario 1 with two marginal benefit terms and
single marginal cost expression implies greater offensive action than scenario 2 with its single
marginal benefit term and two marginal cost expressions. Sufficient weight placed on backlash
curtails a proactive response beyond the standard free-rider response associated with a
transnational terrorism threat (Sandler and Siqueira, 2006). In either scenario, marginal benefits
are equated to marginal costs for an interior solution to (8).
3.2. Nash equilibrium at stage 2
We now turn to the mathematical and geometrical representation of the Nash equilibrium for the
elected policymaker of the two targeted countries that confront the same general terrorism threat
and potential backlash consequences. The simultaneous solution of (8) for each policymaker
denotes the equilibrium counterterrorism policies of elected officials in stage 2. This solution
and comparative statics are described shortly, but first we display the solution graphically.
Equation (8) implicitly defines the best-response functions ( BRi ) for policymaker i
( i = 1, 2; i j )
where i = BRi ( j , ig ) . This function relates is optimal choice of i to
alternative choices of j by country j, along with the weight attached to backlash damage. Other
parameters of the best-response function are suppressed for simplicity. Using the implicit
function theorem, we derive the slope of is best-response function to be:
BRi
=
j
2 p
i ig ( Dii d ii ) + (1 i ) Dij
i j
2 Z ig
i 2
< 0.
The sign of (9) is unequivocal because the cross-partial derivative and the bracketed
expression are both positive, so that the numerator must be negative. Moreover, the second-
(9)
12
order condition ensures that the denominator is positive. By (9), the reaction path of
policymaker i is thus negatively sloped: as he or she expends less counterterrorism effort, his or
her counterpart in j expends more effort. This negative slope can be traced to free riding and an
intent to draw fewer retaliatory attacks. By analogous reasoning, js reaction path is also
negatively sloped. Hence, proactive countermeasures are viewed as strategic substitutes.
In Figure 1, the reaction paths (ignore the dashed reaction path) are displayed with 1 on
the horizontal axis and 2 on the vertical axis. The Nash equilibrium is at N, where the reaction
paths intersect. BR1 is steeper than a downward-sloping line with slope 1, while BR2 is flatter
than a downward-sloping line with slope 1 in order to ensure stability and uniqueness (Cornes
et al., 1999; Cornes and Sandler, 1996). In Figure 1, a line with slope 1 through N will intersect
the horizontal axis at the aggregate Nash equilibrium level of proactive measures for the two
policymakers combined; i.e., * = 1N + 2N .
Next we display the influence of the policymakers weight ig , attached to retaliatory
attacks, on his choice of i . Differentiating (8) with respect to this weight gives:
( Dii dii ) p i
ii pi
i
BRi
=
2 Z ig
ig
i 2
i
dii
+
i
,
(10)
where ii ( i / i )(i / i ) and pi ( p / i )(i / p ) are elasticity expressions. In

particular, ii captures is probability elasticity of suffering a backlash attack in response to its
countermeasures, while pi indicates the probability elasticity of preventing group As attacks at
home or abroad. Henceforth, the first elasticity is called the backlash elasticity, and the second
13
elasticity is termed the prevention elasticity. If ii pi , then the expression in (10) is negative
owing to the numerator being positive and the denominator being negative. Thus, a greater
backlash elasticity relative to the prevention elasticity means that the best-response curve shifts
down and to the left in response to a large backlash weight (see dashed curve BR1 in Figure 1).
As a result, there is less total expended proactive measures at the new Nash equilibrium, N ,
even though policymaker 2 increases such efforts in response to policymaker 1s reduced efforts
i.e., < * in Figure 1. If, however, ii < pi , then the sign of (10) can be negative, zero,
or positive depending on whether the left-hand multiplicative expression in the numerator is less
than, equal to, or greater than (in absolute value) the right-hand expression. When the latter
holds, which we henceforth assume,12 the policymakers best-response curve shifts up in Figure
1 (not shown) and more total counterterrorism effort results. This case follows when the damage
from solely retaliatory attacks at home, dii , is small and the backlash elasticity is also small, so
that is policymaker is not intimidated by group B.
3.3 Stage 2: further implications

To determine the equilibrium responses to changes in 1g and 2 g at stage 2, we implicitly solve
the elected policymakers first-order conditions and obtain i = i* ( ig , jg ) , i, j = 1, 2 and i j.
Next, we incorporate these expressions into the two first-order conditions in (8) and totally
differentiate the resulting equation with respect to the two alphas to display the comparative
static reactions to changes in the weights given by the policymakers. We rearrange the
differentiated expressions and apply Cramers Rule to obtain the following proposition:
Proposition 1:
14
(i)
If ii pi , then di* d ig < 0 and d * d ig > 0 .

j
(ii) If ii < pi and if ii or dii is small enough, then di* d ig > 0 and
d * d ig < 0 .
j
Proof: See Appendix 1.
Case (i) indicates that if the backlash elasticity is at least as great as the prevention elasticity,
then policymaker is countermeasures will fall as he puts more weight on the retaliatory threat.
As such, the shift displayed with curve BR1 in Figure 1 applies. Policymaker i places a heavier
burden on country j (i.e., d * d ig > 0 ), and both countries are more vulnerable to the general
j
threat as overall proactive measures drops. Proactive efforts are undersupplied owing to freeriding and backlash concerns. When, however, case (ii) applies, policymakers proactive
responses move in opposite directions as ig changes. If, for example, less weight is placed on
backlash damages, then policymaker i exerts less countermeasures at combating the general
terrorism threat while policymaker j expends more effort.
4.
Strategic voting in stage 1
We now fold the game back to stage 1 where each countrys voters can act strategically and elect
a policymaker, who can conceivably improve the voters well-being, perhaps at the expense of
the voters in the other targeted country. Two basic concerns are at play: the desire to free ride
on the proactive response of others and the wish not to draw a retaliatory attack by avenging
group B.13 Strategic voting can result in a worse outcome than without such voting.
Given some specified electoral process, voters in each country are viewed as electing a
policymaker (or government), while taking the election results in the other country as given.
Although the set of voters can differ over the single-dimensional parameter, iv , representing
15
voter ivs weight on damages from a retaliatory attack by terrorists, we assume that one group of
voters is decisive in each country. Moreover, the groups preferences can be characterized by a
representative voter in each country.14 Since voters move first and are assumed to be forward
looking, voters must address a strategic delegation problem insofar as the elected policymaker,
not the voter, picks the proactive response according to his or her own preferences. If the
electorate looks ahead and takes this factor into account, they may choose a policymaker whose
ig will likely differ from the voters own weight. We now investigate the implication of this
difference.
Given our assumptions, the policymaker elected in each country is the one most preferred
by the representative voter from the majority group. Let this voters preference be characterized
by the backlash weight im . In stage 1, the representative voter in country i chooses ig of the
elected policymaker to
minimize Z im = p i im Dii + p (1 i ) Dij + (1 p ) i im dii + C (i* ) ,
(11)
where p, i , and i* are all functions of ig and jg . Analogous to the policymaker objective,
the objective in (11) is a sum of the damages in the various scenarios and the cost of proactive
measures. The sole difference is the weight that the representative voter (and its majority group)
attaches to the possibility of enduring a backlash attack. When determining which policymaker
to elect, each representative voter takes into account the impact of his choice on the policy that
will be played in the subsequent stage of the game. In so doing, each representative voter acts as
a Stackelberg leader vis--vis the elected policymaker (the follower) of both countries, who
displays Nash-Cournot behavior toward one another. Minimizing (11) with respect to ig , and
using policymaker is first-order condition from (8) and the equilibrium best responses to
changes in ig , we obtain the following expression (see Appendix 2 for details):
16
( D dii ) p i + i d im ig =
ii
)
ii pi
ii
jj (
i
i
i im ( Dii d ii ) + (1 i ) Dij + i p ( im Dii Dij ) + (1 p ) im dii ji ,
(12)
where jj > 0 and ji > 0 are defined in Appendix 1. The remaining terms in (12) have been
defined previously, where p j < 0 and i j < 0.
A sufficient condition for the right-hand expression within {i} of (12) to be negative is
that im Dii Dij , so that the representative voters weighted damages from attacks by groups A
and B on is interests exceed the damages from just attacks by group A on is interests. Although
stronger than needed, this assumption is likely to hold provided that the representative voter
views retaliatory attacks at home with sufficient disdain not to reverse the Dii Dij inequality.
We are left with the following proposition:
Proposition 2: Assuming im Dii Dij , there are two scenarios depending on the relative
elasticities to the alternative threats:
(i) If ii pi , then ig > im .
(ii) If ii < pi and if ii or dii are sufficiently small, then im > ig .
Proof: See Appendix 3.
If the elasticity to experiencing a backlash attack is greater or equal to the elasticity to the
general threat of terrorism, then the representative voter will elect a government that puts more
weight on the threat of a backlash than he or she does. This results in each government exerting
less effort to combat the terrorist threat than had voters not acted strategically. Country is
17
voters are motivated by free riding on the proactive response of j and a desire not to draw a
retaliatory response from group B. This agrees with Spains election following 3/11 and the
withdrawal of forces by some other countries with troops in Iraq and Afghanistan once the threat
of a backlash attack grew. If both countries representative voters satisfy case (i), then a
Prisoners Dilemma delegation game follows with both countries reducing proactive efforts
beyond the suboptimal level implied by stage 2.15 In Figure 2, this shows up with the
policymakers best-reaction paths shifting down from the continuous paths to the dashed paths.
As such, the Nash equilibrium goes from N to N , where individual and aggregate proactive
levels fall. Unfortunately, the representative voters strategic actions result in reduced welfare
levels to both i.e., the iso-utility curves associated with N (not displayed) imply lower welfare
levels than those through N as the general threat of terrorism increases at home and abroad.
In case (ii), it still remains possible that less effort toward combating the general threat of
terrorism will follow when the representative voter tries strategically to gain a greater free ride
from the other countrys proactive response by choosing a policymaker who downplays the
backlash concern. That is, the representative voter chooses a policymaker whose backlash
weight is less than im . In case (ii), the representative voter knows that the elasticity of
prevention exceeds the backlash elasticity, where ii or dii is small. Because of the lack of
responsiveness to backlash or the small damages associated with dii , a policymaker has a greater
inclination to address the general terrorism threat without fear of reprisal. As such, a
policymaker that puts more weight on backlash damages will expend more proactive effort in
this case. By choosing a policymaker who cares little about the backlash, the representative
voter installs a policymaker less inclined to act in the hopes of getting a larger free ride from the
18
other targeted country. This kind of strategic thinking on the part of both countries voters will
again result in the downward shifts of the reaction paths in Figure 2. The attempt to profit on the
other countrys efforts yields an undersupply of proactive measures that jeopardizes both
countries and reduces welfare in a Prisoners Dilemma type of scenario. For both cases, voters
strategic action results in the Nash equilibrium shifting in the southwestern direction where the
aggregate proactive response falls.
5.
Concluding remarks and policy implications
This paper presents a three-stage game with three sets of participants: terrorists, elected
policymakers, and voters. The model accounts for the strategic interaction between voters and
their delegated policymakers, charged with deciding proactive countermeasures to limit a
transnational terrorist threat confronting two countries. As such, this paper is the first to
investigate domestic politics in a strategic framework as it applies to counterterrorism. The
analysis shows that strategic foresight by the voter leads to an undersupply of proactive
measures. This reduced effort is motivated by two desires: free riding on the other countrys
countermeasures and limiting any reprisal terrorist attacks. The voter elects a policymaker who
will subsequently exploit his or her counterpart by curbing proactive measures. Similar actions
abroad will result in an equilibrium where welfare is reduced i.e., the strategic move is selfdefeating.
This result indicates that the need for international cooperation when addressing a
common terrorist threat (e.g., al-Qaida, Jemaah Islamiyah, and Abu Nidal Organization) could be
even more important than shown in past studies, which do not consider domestic politics
(Sandler and Siqueira, 2006). This extra difficulty stems from a delegation problem, associated
with the voters reliance on an elected policymaker. This then provides yet another factor why
19
liberal democracies confront a real dilemma when addressing terrorism (Wilkinson, 1986).
Nations must devise some mechanism for orchestrating an international proactive response to a
common terrorism threat. To date, the best example of this is the Afghanistan response. But
even there, most of the effort fell on the US and UK shoulders with token help by Canada,
Australia, and Denmark (The Economist, 2006). Reprisal attacks on British, Australian, South
Korean, and Spanish interests were intended by terrorists to limit or eliminate these countries
participation a strategy that worked in the case of Spain and South Korea. Terrorists remain
better than governments in acting as a united force.
As a future direction, the influence of strategic voting on cooperative solutions can be
investigated. The delegation problem may still work against cooperation if voters elect
policymakers with greater backlash concerns or free-riding interests. The analysis here can also
be applied to defensive measures deployed by commonly targeted nations. Even without
cooperation, strategic voting may ameliorate the oversupply of defensive actions in an attempt to
transfer the attack to a softer target abroad. Since such measures are strategic complements,
strategic voting, and the leadership that it implies, may elect officials who are less concerned
with transferring the attack, particularly when the country has interests at home and abroad.
20
Appendix 1: Derivation of Proposition 1
Following the procedures outlined in the text, we obtain:

di* i jj
=
, i, j = 1, 2 , i j ,
d ig
d *
j
d ig
i ji
(A1)
, i, j = 1, 2 , i j ,
(A2)
where

11 12
,
21 22
i ii pi
jj
( Dii dii ) p i + i d
i
ii
, i = 1, 2,
2 p
p j
jg ( D jj d jj ) + (1 j ) D ji + 2
jg ( D jj d jj ) D ji + C , i, j = 1, 2, i j ,
2 j
j
j j
ji
2 p
j jg ( D jj d jj ) + (1 j ) D ji , i, j = 1, 2 , i j .
j i
Given jj > 0 , ji > 0 , and the fact that stability requires 11 22 12 21 > 0, the signs of
(A1) and (A2) depend on the sign of i .
Thus if ii pi , then i > 0 so that di* d ig < 0 and d * d ig > 0 . For the
j
remaining case, i can be rewritten as
i ii pi p ( Dii dii ) + ii d ii i ,
owing to the definition of ii . If , therefore ii < pi and ii or dii is sufficiently small, then
i < 0 and we obtain: di* d ig > 0 and d * d ig < 0 .
j
21
Appendix 2: Derivation of equation (12)
Minimizing (11) with respect to ig , we obtain:

*
*
p i*
p j
i i* im
i j im
im
im
i Dii +
i Dii + p
Dii + p
Dii
i ig
j ig
i ig
j ig
*
*
i*
j
p i*
p j
1 i ) Dij +
1 i ) Dij p i
Dij p i
Dij
(
(
i ig
j ig
i ig
j ig
*
*
i i* im
i j im
p i*
p j
im
im
i dii
i dii + (1 p )
dii + (1 p )
dii
i ig
j ig
i ig
j ig
+ C
i*
=0.
ig
(A3)
Rearranging, we obtain:
p
p
p
i im Dii +
(1 i ) Dij i im dii + p i im Dii p i Dij
i
i
i
i
i
*
+ (1 p ) i im dii + C iig =
i

p
p
p
i im Dii +
(1 i ) Dij i im dii + p i im Dii p i Dij

j
j
j
j
j
j
+ (1 p ) i im d ii ig .
j

(A4)
Using the policymakers first-order condition in (8) to substitute out for C in (A4) and
rearranging slightly, we have:
p
p
p
i im Dii +
(1 i ) Dij i im dii + p i im Dii p i Dij + (1 p ) i im dii
i
i
i
i
i
i
*
p
p
p
i ig Dii
(1 i ) Dij + i ig dii p i ig Dii + p i Dij (1 p ) i ig dii iig
i
i
i
i
i
i

p
j
im
im
+ i p ( im Dii Dij im d ii ) + im dii ig .
=
i ( Dii Dij dii ) + Dij

j
Focusing only on the left-hand side (A5), we cancel and arrange terms to yield:
(A5)
22
p
*
p
i Dii ( im ig )
i dii ( im ig ) + p i Dii ( im ig ) + (1 p) i dii ( im ig ) iig .
i
i
i
i

Further rearranging slightly gives:
p
*
i ( Dii dii ) + p i ( Dii dii ) + i dii iig ( im ig ) .
i
i
i
After some slight manipulations, the above expression becomes:
*
p i i i ( Dii d ii ) p i i i
d ii ig ( im ig ) .
+
+
i
i
i p i i
Using the two definitions for elasticity and putting the above expression together with the righthand side of equation (A5), we have:
( D dii ) p i + i d i* im ig =
ii
(
)
ii pi
ii
i
i ig
i im ( Dii dii ) + (1 i ) Dij + i p ( im Dii Dij ) + (1 p ) im d ii ig . (A6)
Using (A1) and (A2), and canceling terms, the above expression becomes (12) in the text.
Appendix 3: Derivation of Proposition 2
By assumption, im Dii Dij . From our results in Appendix 1, we know that jj > 0 and
ji > 0 . Furthermore, given ii pi for case (i), we can sign (12) in the following way:
{+}( + ) ( im ig ) = {}( + ) .
The parenthesis terms in the above expression represent the terms jj and ji in (12). From the
above equation, we can conclude that im < ig . Alternatively, for case (ii) where ii < pi
and ii or dii is small, we can sign (12) as follows:
23
{}( + ) ( im ig ) = {}( + ) ,
from which we can conclude that im > ig .
24
Footnotes
1. To simplify the analysis and discussion, we only allow for such attacks at home. We can,
however, extend the analysis to permit backlash incidents at home and abroad. For example,
Israeli actions against the Palestine Liberation Organization led, in part, to a more militant
breakaway Abu Nidal Organization that attacked Zionist targets at home and abroad. The
Jemaah Islamiyah car bombing of the Australian embassy in Jakarta, Indonesia, however, fits the
assumption of the model, because a countrys embassy is considered to be home soil. Australia
was targeted in the bombing that killed 9 and injured over 150, owing to its support of US-led
operations against al-Qaida.
2. From 1968 until the early 1980s, this common threat either came from the Palestinian
groups or the leftists. Since 1979, this threat came increasingly from Islamic fundamentalist
terrorists. The model can be expanded to allow there to be more than two threatened countries.
This extension would greatly increase the notation without additional insight.
3. For example, see Arce and Sandler (2005), Sandler and Lapan (1988), and Sandler and
Siqueira (2006). For domestic terrorism, the two active players are the terrorists and the
policymaker (Anderton and Carter, 2005; Frey and Leuchinger, 2003).
4. Only Rosendorff and Sandler (2004) in a recruitment context examined grievances
stemming from proactive measures. These authors did not include voters.
5. The risk of a counterattack may be tied to vulnerability soft-target status. Our analysis
implicitly assumes equal defensive measures, so that relative vulnerability is not a consideration.
Earlier papers have investigated soft-target vulnerability (Heal and Kunreuther, 2005).
6. Because voters choose policymakers that later implement policy, strategic voting is
analogous to strategic delegation. In a related paper, Persson and Tabellini (1992) considered
strategic delegation in the context of tax competition and European integration. In a
25
noncooperative game, these authors showed that voters possessed incentives to delegate fiscal
`policy to policymakers who were different than them in terms of endowments. In the symmetric
political equilibrium, voters of both countries delegated policymaking to a government that was
more prone to taxation than both median voters. Also, see Besley and Coate (2003) and Dur and
Roelfsema (2005) on different delegation problems.
7. Equation (2) follows from writing the probability density function as p = p ( ) ,
where = b g ( ) m 1 g ( ) h is based on (1). Thus p = 1 P ( ) , where the
cumulative density function P ( i ) equals:
ds
( ) = 2 + 2 .
8. To derive (5), we note that 1 = 1 P ( 2 1 ) , where P ( i ) equals:

2 1
ds
1
= + 2 1.
2
( ) 2
9. For simplicity, we assume that the backlash attack by group B must be in country i to
cause losses to i. We can easily allow Bs attacks to harm is interests at home and abroad. The
model will be the same provided that the Ds and ds are ordered as in the text. This will hold if
there is a host country disadvantage i.e., losses to i are greater from B hitting is interests at
home than abroad.
10. The second-order condition is given by
p
2 Z ig 2 p
ig ( Dii dii ) + (1 i ) Dij + 2 i
ig ( Dii dii ) Dij + C > 0.
=
2
2 i
i
i
i i
11. Even if ig Dii < Dij , the expression can still be positive if the dii expression is
sufficiently large.
12. We employ this assumption on two grounds. First, it provides a more distinct case to
26
earlier situations where reaction paths shift down. Second, this assumption allows us later to
utilize a direct connection between voter preferences over damages and government policy for
particular scenarios that simplifies discussion without unduly sacrificing generality by
maintaining two alternative scenarios.
13. A good example of this reaction is the terrorists response to the US retaliatory raid on
Libya on April 15, 1986 for its alleged involvement in the La Belle discotheque bombing in
Berlin earlier in April. Following the US raid, terrorism directed at US interests at home and
abroad increased greatly (Enders and Sandler, 1993, 2006).
14. Such a group may prove decisive, given its skills at organizing and mobilizing its
members. Historical and demographic factors may also play a role in maintaining this groups
predominant electoral role. For more specific models concerning voting and elections, see
Persson and Tabellini (2000).
15. Free-riding incentives in stage 2 lead to suboptimal offensive countermeasures, since
neither policymaker accounts for reduced damages to the other country from his or her efforts
(Sandler and Siqueira, 2006).
27
References
Anderton, C.H., Carter, J.R., 2005. On rational choice theory and the study of terrorism. Defence
and Peace Economics 16, 275282.
Arce, D.G., Sandler, T., 2005. Counterterrorism: a game-theoretic analysis. Journal of Conflict
Resolution 49, 183200.
Besley, T., Coate, S., 2003. Centralized and decentralized provision of local public goods: a
political economy approach. Journal of Public Economics 87, 26112637.
Cornes, R., Hartley, R., Sandler, T., 1999. Equilibrium existence and uniqueness in public goods
models: an elementary proof via contraction. Journal of Public Economic Theory 1, 499
509.
Cornes, R., Sandler, T., 1996. The Theory of Externalities, Public Goods, and Club Goods, 2nd
ed. Cambridge University Press, Cambridge.
Dur, R., Roelfsema, H., 2005. Why does centralisation fail to internalise policy externalities?
Public Choice 122, 395416.
The Economist, 2006. Afghanistan: heading south. The Economist 378(8463), 12.
Enders, W., Sandler, T., 1993. The effectiveness of anti-terrorism policies: a vectorautoregression-intervention analysis. American Political Science Review 87, 829844.
Enders, W., Sandler, T., 2006. The Political Economy of Terrorism. Cambridge University
Press, Cambridge.
Faria, J. R., Arce, D.G., 2005. Terror support and recruitment. Defence and Peace Economics
16, 263273.
Frey, B.S., Luechinger, S., 2003. How to fight terrorism: alternative to deterrence. Defence and
Peace Economics 14, 237249.
Heal, G., Kunreuther, H., 2005. IDS model of airline security. Journal of Conflict Resolution
28
49, 201217.
Kunreuther, H., Michel-Kerjan, E., 2004. Policy watch: challenge for terrorism risk insurance in
the United States. Journal of Economic Perspectives 18, 201214.
Kunreuther, H., Michel-Kerjan, E., Porter, B., 2003. Assessing, managing and financing extreme
events: dealing with terrorism. Working Paper 10179. National Bureau of Economic
Research, Cambridge, MA.
Persson, T., Tabellini, G., 1992. The politics of 1992: fiscal policy and european integration.
Review of Economic Studies 59, 689701.
Persson, T., Tabellini, G., 2000. Political Economics. MIT Press, Cambridge, MA.
Rosendorff, B. P., Sandler, T., 2004. Too much of a good thing? The proactive response
dilemma. Journal of Conflict Resolution 48, 657671.
Sandler, T., Lapan, H.E., 1988. The calculus of dissent: an analysis of terrorists choice of
Targets. Synthsis 76, 245261.
Sandler, T., Siqueira, K., 2006. Global terrorism: deterrence versus preemption. Canadian
Journal of Economics 39, 13701387.
Wilkinson, P., 1986. Terrorism and the Liberal State, revised ed. Macmillan. London.
q2
BR1
N'
q2N
N
BR2
q1N
BR1'
Q'
Q*
q1
Fig. 1. Elected Policymakers Reaction Paths in Stage 2
q2
N
BR2
_
N
__
BR2
BR1
__
BR1
0
Fig 2. Influence of Voters Strategic Choice on Proactive Measures
q1
B.J.Pol.S. 37, 573586 Copyright 2007 Cambridge University Press

doi:10.1017/S0007123407000324 Printed in the United Kingdom
Terrorist Signalling and the Value of Intelligence

DANIEL G. ARCE
AND
TODD SANDLER*
This article presents a model of terrorist attacks as signals where the government is uncertain as to whether
it is facing a group that is politically motivated or militant. Pooling equilibriums result with two types of
ex post regret: P-regret, where the government concedes to political types that would not subsequently attack;
and M-regret, where the government does not concede to militant types that subsequently attack at greater
levels. Avoidance of such regret denes a measure of the value of intelligence. Counter-terrorism policy can
then be characterized in terms of whether a government should focus on increased intelligence versus increased
security (hardening targets). The recommended use of asset freezing is also evaluated in terms of the resources
required by terrorists to achieve the various equilibriums. Finally, this article supports the empirical nding
of intertemporal substitution of resources by terrorists, concerned with the level of government response to
their attacks.
Terrorism is the premeditated use, or threat of use, of violence by individuals or subnational

groups to obtain a political or social objective through intimidation of a target audience,
beyond that of the immediate victims. Terrorists try to impose sufcient costs on a target
constituency so that its government is pressured into conceding to the terrorists demands,
when concessions are viewed as less costly than enduring future attacks. The immediate
response to an attack is for the government to address the initial consequences, including
clean-up and additional security measures. Thereafter, the government assesses the likely
subsequent threat that the group poses in terms of its resources and proclivity for future
attacks. Politically orientated groups are ultimately interested in change and will eventually
channel resources into political activities. In contrast, militant groups are more vengeful
and will focus on attacks until concessions are granted.
Consider, for example, the Spanish government, which has had an armed struggle since
1968 with the Basque-separatist group Euskadi ta Askatasuna (ETA). Spain also suffered
from the Madrid train station bombings on 11 March 2004 by Islamic terrorists seeking
a withdrawal of Spanish troops from Iraq and Afghanistan. ETA can be characterized as
a politically motivated group because the demands of its larger constituency may be met
through the granting of more regional autonomy and self-determination (for example,
responsibility for social services, taxation and policing). On occasion, ETA has agreed to
a cease-re. Moreover, ETA has been discriminate in its targeting, avoiding attacks with
mass casualties. The Islamic terrorists in the Madrid bombing were more militant, intent
on escalating attacks if their demands were not immediately met. They threatened to
turn Spain into an inferno should the withdrawal of Spanish troops from Iraq not take
place.1 Three days after the Madrid bombings, Spanish voters reversed their apparent
course to re-elect the government of the popular party Aznar and elected the socialist
* School of Economic, Political and Policy Sciences, University of Texas at Dallas. This article has beneted
from the comments by three anonymous referees and the Editor Hugh Ward; the authors are solely responsible
for the articles content.
1
MSNBC.com, Group Threatens to Turn Spain into Inferno: Islamic Group Issues Warning after Alleged
Plotters Kill Selves, 5 April 2004, accessed 3 June 2005.
574
ARCE AND SANDLER
Zapatero government, which had campaigned under the promise to withdraw Spanish
troops in Iraq unless they came under United Nations control.
In assessing the signalling content of an attack, the government must determine an
appropriate response that hinges on its beliefs about the militancy of the terrorists. This
decision is made under conditions of incomplete information, because the government is
unlikely to be completely informed whether the terrorists preferences are militant or
political. This lack of information may stem from many causes. For example, multiple
terrorist groups may be claiming responsibility for a series of attacks. Moreover, terrorist
groups may have both political and militant elements that vie for dominance, so that the
controlling wing may change and not be apparent at any point in time. This change in group
orientation may arise when government concessions appease the moderates, thereby
leaving the more extreme elements to carry on the terrorist campaign.2 Following
concessions of partial autonomy made to ETA in 1978, extremist elements in ETA waged
a much more deadly campaign into the 1990s. Additionally, new and splinter groups may
come on the scene. Splintering was especially true of the Palestine Liberation Organization
(PLO), which gave rise to more militant groups such as Black September, Popular Front
for the Liberation of Palestine, Abu Nidal Organization and others. During a groups initial
attacks, the target government does not know the groups resolve or militancy. In still other
instances, no group may claim responsibility, leaving the government unenlightened as to
the perpetrator or its orientation.
The effect of incomplete information is twofold. First, there is a reputation incentive for
politically motivated terrorists (P-types) to mimic militants (M-types) with a spectacular
attack if it will quickly lead to concessions. Secondly, an incentive may exist for M-types
to mimic P-types so that the government will be less compelled to harden targets, which
would diminish the likelihood (or increase the cost) of the logistical success of future
terrorist activity. This then feeds into a notion of intelligence consistent with that given
in Cilluffo et al. by involving an understanding of the motivations, thoughts and future
plans of ones enemies.3 Multi-disciplinary intelligence, including insights into the
cultures and mindsets of terrorist organizations, is crucial for counter-terrorism policy. In
particular, there is the possibility of ex post regret where a government concedes to
politically motivated terrorists to whom it would not have conceded under complete
information. This type of regret may arise because the magnitude of the attacks leads the
government to conclude falsely that it is facing militants who will escalate attacks if their
demands are not met. Alternatively, a government may hold rm and face a second type
of ex post regret when it is subsequently attacked by militant terrorists whom the
government would have accommodated under complete information. Examples of the rst
type of ex post regret include concessions to groups such as the PLO, African National
Congress (ANC), Irish Republican Army (IRA) and ETA, which each have a history of
using diplomacy as well as sustaining a military wing, whose inuence is not well
understood.4 Examples of the second type of regret include the Algerian revolt (195462)
and Israels conict with Hezbollah and Hamas, where the government did not seek a
2
Ethan Bueno de Mesquita, Conciliation, Counterterrorism, and Patterns of Terrorist Violence, International
Organization, 59 (2005), 14576; Todd Sandler and Daniel Arce, Terrorism and Game Theory, Simulation and
Gaming, 34 (2003), 31937.
3
Frank L. Cilluffo, Ronald A. Marks and George C. Salmoiraghi, The Use and Limits of US Intelligence,
Washington Quarterly, 25 (2002), 6174.
4
Per Baltzer Overgaard, The Scale of Terrorist Attacks as a Signal of Resources, Journal of Conict
Resolution, 38 (1994), 45278.
575
political solution and attacks subsequently escalated. We will discuss these cases in further
detail in the body of the article. There is, thus, a value of intelligence that corresponds to
eliminating or diminishing the likelihood of ex post regret.5 Similarly, Hoffman has argued
that because religious-based terrorists are generally more violent than secular ones, there
exists a need for intelligence to identify terrorists type/preferences.6
A suicide mission is a tactic of some militant groups to signal their resolve.7 Such
missions indicate that the group will gladly sacrice even its human resources to raise the
carnage of the campaign. This graphic signal was rst employed by Hezbollah in its
successful efforts to rid Lebanon of Israeli forces and then foreign peacekeepers in 1982
and 1983, respectively. Noteworthy suicide attacks included the 23 October 1983 suicide
truck bombing of the US Marines barracks and the near-simultaneous suicide car bombing
of the French paratroopers apartment building. The effectiveness of these attacks in
removing the peacekeepers led other militant groups such as, Hamas, the Palestine
Islamic Jihad (PIJ), the Al-Aqsa Martyrs Brigade and the Liberation Tigers Tamil Eelam
(Tamil Tigers) to adopt suicide missions. In some instances, these suicide campaigns
resulted in concessions (for example, political concessions to Tamil Tigers) after an initial
regret, once the extent of future attacks became understood by the targeted government.
In this article we examine a signalling model of terrorist attacks in which the government
has incomplete information about terrorists types. Past signalling models focused on
attacks as signals of terrorist resource levels, where terrorists are (initially) able to stage
an attack of sufcient magnitude to induce concessions, irrespective of whether they have
high or low resources. Specically, Lapan and Sandler examined the case where terrorists
are militant and expend all remaining resources on attacks if concessions are not granted.8
By contrast, Overgaard analysed politically motivated groups that allocate all remaining
resources to (non-violent) political purposes if no accommodations are made.9
Our analysis is centred on the creation of a unifying model that simultaneously allows
for both militant and political terrorist types. This facilitates a comparison of the value of
intelligence for each case. No generality beyond the nexus of intelligence and uncertainty
about terrorists types/preferences is claimed. In addition, our model permits a fundamental
extension whereby the government institutes defensive measures when attacks surpass a
threshold, so that the value of intelligence depends not only on whether concessions occur,
as is the case in the prior literature, but also on counter-terrorism policy. Specically, the
value of intelligence is broadened to include not only ex post regret following concessions,
but also ex post regret following an escalation of terrorism in the absence of an
accommodation. We characterize when a government should focus on increased
5
The literature on the value of intelligence for terrorism has focused on the prevention of specic events, such
as 9/11 or terrorists use of weapons of mass destruction see, e.g., Kevin Michael Derksen, Commentary: The
Logistics of Actionable Intelligence leading to 9/11, Studies in Conict and Terrorism, 28 (2005), 25368; Francis
H. Marlo, WMD Terrorism and US Intelligence Collection, Terrorism and Political Violence, 11 (1999), 5371.
In so doing, earlier articles indicated what type of intelligence (e.g., signal interception, human, or imagery) has
the greatest effectiveness at each stage of a terrorist event. Unlike our exercise, the literature has not characterized
the value of intelligence in terms of a signalling game of incomplete information, where the government is
ill-informed about the nature of the terrorist group.
6
Bruce Hoffman, Inside Terrorism (New York: Columbia University Press, 1998), pp. 185205.
7
Bruce Hoffman and Gordon H. McCormick, Terrorism, Signaling, and Suicide Attacks, Studies in Conict
and Terrorism, 27 (2004), 24381.
8
Harvey E. Lapan and Todd Sandler, Terrorism and Signalling, European Journal of Political Economy,
9 (1993), 38397.
9
Overgaard, The Scale of Terrorist Attacks as a Signal of Resources.
576
ARCE AND SANDLER
intelligence versus increased security (hardening targets) to mitigate this possibility.

Finally, the resulting equilibriums exhibit intertemporal substitution of terrorist resources
where a militant group may restrain attacks for strategic advantage, thereby exhibiting
varying patterns of terrorism, consistent with low-terrorism and high-terrorism periods as
have been empirically identied.10 The effects of proactive measures to freeze terrorist
assets are also examined in this context.
The remainder of the article contains three sections. The next section presents a unifying
signalling model where governments are uninformed about terrorist types. In the ensuing
section, we indicate the value of intelligence. The nal section contains concluding
remarks.
TERRORIST SIGNALLING: A UNIFYING MODEL
In this section, we introduce a signalling model where the government has incomplete
information about the type (preferences) of terrorists that it confronts. Information is
asymmetric because terrorists can observe the outcomes of elections, implementation of
proactive policies and the hardening of potential targets. As is standard, we consider a
two-period model with dichotomous type set: {M, P}. Terrorists are M-types if they are
militant; that is, they receive a benet equal to the discounted sum of their attacks in the
rst and second period when the government holds rm. This is the case if terrorists
perceive a positive value from attacking an obstinate government, or if they test a
governments never-to-concede pledge by unleashing their military wing. In addition,
fundamentalist terrorists often view violence as sanctied, so that they are less constrained
in their carnage. Militant fundamentalists use violence to punish non-believers and seek
maximum casualties even when attacks will not result in concessions. Similarly, Doran
discussed militant (Arabic/Islamic) terrorists in terms of their predilection for escalation.11
To summarize, militants are willing to escalate their attacks as a form of brinkmanship that
challenges the interests of the opposing power to provoke the threat of intervention, if not
actual intervention. For these militant terrorists, there exists a gap between the long-term
goals set by their (religious/ideological) convictions and their immediate goals,
constrained by unlikely successful political action. The terrorists short-term goals are
therefore aimed at foiling the targeted government, through escalated attacks, rather than
the attainment of their long-term goals. For this reason, some argued that terrorist groups
such as al-Qaeda are not susceptible to traditional international political pressures.12
By contrast, P-types are politically motivated because an attack is a pure cost in
terms of both resources and political capital. They consequently direct all secondperiod resources to political activity, from which they receive a benet. In comparison to
M-types, P-types have reached the point where the opportunity cost of escalation is
unacceptably high. Elsewhere, we have analysed joint consideration of M-types and
P-types in a bargaining context13 and Siqueira has done so in terms of the incidence of
10
Such periods have been identied by Walter Enders and Todd Sandler, Patterns of Transnational Terrorism,
19701999: Alternative Time-Series Estimates, International Studies Quarterly, 46 (2002), 14565; Walter
Enders and Todd Sandler, Transnational Terrorism 19682000: Thresholds, Persistence, and Forecasts,
Southern Economic Journal, 71 (2005), 46782.
11
Michael Doran, The Pragmatic Fanaticism of al Qaeda: An Anatomy of Extremism in Middle Eastern
Politics, Political Science Quarterly, 117 (2002), 17790.
12
Cilluffo, Marks and Salmoiraghi, The Use and Limits of US Intelligence, p. 65.
13
Sandler and Arce, Terrorism and Game Theory.
577
competing-faction violence.14 Neither of the articles referred to above addressed the

potential for inferring terrorists type through past attack patterns.
Upon receiving a signal in terms of rst-period attacks, the government either concedes
(C) or does not concede (D). Governments often have a different response to spectacular
attacks; consequently, we dene an attack of at least (resource) level R* to be such that
a non-conceding government signicantly increases its level of deterrence/defensive
policies to limit successful future attacks.15 An example is to harden targets through
increased security, thereby decreasing the probability of a logistical success in a
second-period attack. In this way, the discount factor for a second-period attack subsequent
to a rst-period attack of at least level R* is given as . By comparison, the discount factor
applied to all other second-period attacks is given by , where . Following 11
September 2001 (9/11), the United States created the Department of Homeland Security
(DHS) to harden a wide range of targets (for example, airports, airplanes, public places,
borders, ports and critical infrastructure), thereby greatly lowering . The US response is
consistent with 9/11 attacks signalling the likely presence of a militant group, whereby
defensive measures are prudent in the absence of concessions.
We assume that terrorists receive resource level R in each period, where R R*. In the
rst period, terrorists select their attack level from the dichotomous signal set {a, A}, where
a [0, R*) and A [R*, R]. An A-attack is considered large enough for the government
to increase its defensive posture, thereby inducing discount factor if a second-period
attack occurs.
The game is illustrated in Figure 1, with a timeline that is given as follows:
1. Nature (N) selects the terrorists type from {M, P}.
2. In the rst period, terrorists select their signal from the set {a, A}, where A a as
dened above. The dotted lines connecting nodes in Figure 1 are the governments
(G) information sets, which are labelled according to the signal the government
receives: GA or Ga.
3. Upon receiving this signal, the government either concedes (C) to the terrorists or holds
rm (D).
4. If the government does not concede, terrorists combine the remainder of their
rst-period resources with their second-period resources. How these resources are put
to use depends upon the terrorists type/preferences, as specied by their payoffs.
Militants (M-types) will expend all available resources in a second-period attack, while
P-types will use them towards non-violent means.
Payoffs are expressed symbolically as P for P-types,
government. They are calculated as follows:
for M-types, and
for the
1. Each terrorist type receives resource level R in each period.

2. The government faces the costs of the attack levelled against it in the rst period: A
or a.
14
Kevin Siqueira, Political and Militant Wings within Dissident Movements and Organizations, Journal of
Conict Resolution, 49 (2005), 21836.
15
Daniel G. Arce and Todd Sandler, Counterterrorism: A Game-Theoretic Analysis, Journal of Conict
Resolution, 49 (2005), 183200; Todd Sandler and Kevin Siqueira, Global Terrorism: Deterrence versus
Preemption, Canadian Journal of Economics, 39 (2006), 137087. In Overgaard, The Scale of Terrorist Attacks
as a Signal of Resources, the act of not conceding is described as a response, which we interpret as an increased
defensive posture.
578
ARCE AND SANDLER
Fig. 1. Incomplete information about terrorists preferences
3. If the government concedes, it incurs second-period costs of S 0. Terrorists receive

a payoff equal to their net remaining funds: R A or R a, plus vR, where v is the
victory parameter that increases the value of second-period resources relative to those
discounted by or . Essentially, v is a third discount factor.
4. If the government does not concede:
i. P-types receive R A R or R a R, the discounted present value of their
remaining resources put to political use.
ii. M-types receive a benet equal to the discounted value of their remaining resources,
which they expend in a second-period attack. Subsequent to an A-level attack, this
payoff is discounted by because the government responds to such an attack
with increased defensive policies. The discounted value of the two attacks is
therefore A (R A) R 2 R (1 )A. Similarly, after an a-attack,
M-type terrorists gain 2 R (1 )a. In either case, the governments payoffs are
dened by the zero-sum nature of attacks, so that they lose an amount equal to the
terrorists payoff.
The critical levels of belief in this model correspond to the conditional probabilities
such that the government concedes at information sets GA and/or Ga. This occurs when
its belief that it is facing an M-type meets or exceeds a threshold level. Belief i
corresponds to nodes i 1, 2, 3, 4, where 1 2 1, 3 4 1. G concedes at GA if
its expected payoff is such that:
EG[CGA] A S A
1
2 [2
R (1 )A]
S/ (2R A) LA.
1 EG[DGA];
i.e., if
(1)
When the government G experiences an A-level attack, it will concede provided that its
belief that it is facing an M-type exceeds the lower bound LA given in Condition 1. The
579
lower is LA, the more likely that a concession will occur. From Condition 1, we have
LA/S 0. As the costs of concession increase, the government is less likely to concede.
Lapan and Sandler recognized that the value of S may be determined through a
declaration or commitment by the government never to concede to terrorists demands.16
Such a commitment has the effect of reducing the governments options, because, as S
increases, it becomes less likely that the government will concede regardless of the prior
probability of M-types.17 The beliefs embodied in Condition 1 also imply that LA/R 0,
so that the government is more apt to concede as terrorists resources increase. This
follows because a larger R means that the government incurs greater damage from a
militant groups second-period attacks if the government holds rm. Condition 1 also
implies that LA/( / ) 0. Recall that at GA the D strategy corresponds to an increase
in the governments defensive posture relative to that at Ga, leading to a greater discounting
of second-period attacks where . As defensive measures are more effective, /
increases; consequently, the government must be more certain that it is facing an M-type
to concede. We denote the reverse of the inequality in Condition 1 as 1, indicating the
condition on beliefs such that the government does not concede at GA.
Similarly, the government concedes at Ga if EG[CGa] a S a 3 [2 R
(1 )a] 4 EG[DGa], which indicates the following threshold:
4 S/(2R a) La.
(2)
The signs on La/S and La/R are the same as those associated with LA for identical
reasons. Here, the comparative effect of versus , which applied for LA, does not come
into play because it is only through an attack of level A R* that the government increases
its defensive posture (in relative terms), resulting in discount factor . Finally, Condition
2 denotes the condition under which Condition 2 is reversed, in which case the
government selects D at Ga.
SIGNALLING EQUILIBRIUMS AND THE VALUE OF INTELLIGENCE
Once again, incomplete information raises the concerns that politically motivated terrorists
may be seeking a quick resolution to their grievances by posing as militant types, and/or
militant types have purposely avoided spectacular attacks to forestall a heightened focus
on security by their targets. As an example of the latter phenomenon, Enders and Sandler
presciently stated that authorities should focus on intelligence and prophylactic measures
in anticipation of upturns in terrorist incidents involving casualties following fairly lengthy
lulls of greater than two years.18 By 9/11, the US was well beyond a two-year lull. In this
way, the value of intelligence that we investigate corresponds to eliminating or reducing
the occurrence of ex post regret associated with misreading terrorists true intentions. One
such occurrence is ex post P-regret, meaning that the government concedes to P-types,
which, under complete information, the government would hold rm against. Another
16
Lapan and Sandler, Terrorism and Signalling. The Irangate hearing following the Reagan administrations
arms-for-hostages negotiations was an effort by the US Congress to raise S to subsequent administrations.
17
This is akin to a sense of government resolve see Robert Powell, The Dynamics of Longer Brinkmanship
Crises, in Peter C. Ordeshook, ed., Models of Strategic Choice in Politics (Ann Arbor: University of Michigan
Press, 1989), pp. 15175.
18
Walter Enders and Todd Sandler, Is Transnational Terrorism Becoming More Threatening? A Time-Series
Investigation, Journal of Conict Resolution, 44 (2000), 30732.
580
ARCE AND SANDLER
possibility is ex post M-regret, where, under complete information, the government would
have preferred either concession or increased security in the face of escalated militant
attacks. Clearly, either type of ex post regret is only possible in a pooling equilibrium where
both types send the same signal. Consequently, we begin with an examination of the
pooling equilibriums, followed by a characterization of the separating equilibrium where
each type sends a different signal.
An A-pooling equilibrium occurs under Conditions 1 and 2 so that the governments
(local) strategy at GA is C and at Ga it is D. Together, these strategies comprise
the behavioural strategy CD. Henceforth, we adhere to the convention of listing
the governments strategy at GA rst and its strategy at Ga second. Given Conditions 1
and 2, P-types undertake an A-attack in period 1 if P[A, CD] R A vR
R a R P[a, CD]. This simplies to
R (A a)/(v ),
(3)
thereby dening a resource constraint to be met for this equilibrium to hold.

Furthermore, for M-types to engage in an A-attack, it must be the case that
M[A, CD] R A vR 2 R (1 )a
M[a, CD]; i.e.,
R [A (1 )a]/[(1 ) (v )].
(4)
Information set Ga is not reached in an A-pooling equilibrium. Nevertheless, actions

off-the-equilibrium path must be justied in terms of the consistency and rationality of
the set of beliefs and actions specied there. A set of beliefs that supports D at Ga is that
the government believes that it is more likely to be facing a P-type at Ga. This is consistent
with the upper bound on 4 given in Condition 2, implying that the governments belief
that it is facing an M-type is low. Furthermore, P-types would send the out-of-equilibrium
signal a 0, implying that Condition 3 rather than Condition 4 is the binding constraint
on R. Finally, the A-pooling equilibrium occurs with ex post P-regret because the
government is potentially conceding to P-types to whom it would not have conceded under
complete information. For purposes of comparison, all equilibrium conditions are
summarized in Table 1.
An example of this pooling equilibrium is the internationalization of the Palestinian
cause.19 The premier example of a Palestinian-based spectacular (A-level attack) is the
1972 Munich Olympics hostage incident staged by the Black September PLO offshoot,
resulting in the death of eleven Israeli Olympian competitors and ve terrorists. What
actually occurred in the aftermath of the ill-fated attempt to concede to the Black September
terrorists is entirely consistent with the payoffs that follow information set GA. The
European reply to this security failure was immediately to establish special anti-terrorist
units that successfully acquitted themselves in subsequent hostage incidents (for example,
Grenzschutzgruppe Neuns rescue of a hijacked Lufthansa aeroplane at Mogadishu,
Somalia on 18 October 1977),20 thereby implying a discount factor of for future
attacks. During the same time period, the PLO was granted special observer status in the
United Nations, and, by the end of the 1970s, the PLO had formal diplomatic relations with
more countries than did Israel, consistent with the vR component of payoffs.21
19
Hoffman, Inside Terrorism, pp. 6786.

Lufthansa ight 181, a Boeing 737, was hijacked en route from Mallorca to Frankfurt on 13 October 1977.
The plane was stormed in Mogadishu, following stop-overs in Rome, Larnaca, Dubai and Aden.
21
Hoffman, Inside Terrorism, p. 75.
20

TABLE
581
Summary of Equilibriums
Equilibrium
Conditions on
beliefs
A-pooling
C at GA; D at Ga
a-pooling
C at GA; C at Ga
a-pooling
D at GA; D at Ga
R [(1 )A (1 )a]/2( )
Separating
D at GA; D at Ga
R [(1 )A (1 )a]/2( )
S/ (2R A)
4 S/(2R a)
S/ (2R A)
4 S/(2R a)
S/ (2R A)
4 S/(2R a)
11
31
Forms of regret
Ex post P-regret:
potential
concessions
to P-types
Ex post P-regret:
potential
concessions
to P-types
Ex post M-regret:
M-types escalate
None
Value of
intelligence
S
(2R a S)
Equilibrium
actions make
information
complete.
Next, consider an a-pooling equilibrium with concession. When Conditions 1 and

2 hold, the governments strategy is CC.22 It follows that P[a, CC] P[A, CC] and
M[a, CC]
M[A, CC] because A a. For example, instead of increasing counterterrorism measures (inducing ), governments may accommodate terrorists.23 Indeed, several
European nations (France and Greece in particular) have allegedly accommodated M-types
in order to tacitly obtain immunity from attacks.24 Furthermore, Overgaard argued that at
times concessions made to the ANC, IRA and PLO can be understood in terms of ex post
P-regret, because these organizations commitment to their military wings is not well
understood.25
In the prior literature on signalling and terrorism, ex post regret occurred under an
A-pooling equilibrium in Lapan and Sandler and an a-pooling equilibrium in Overgaard.26
Neither type of pooling equilibrium took place in the other model, owing to differences
in preferences posited for terrorists in each case. As either type of pooling equilibrium can
result in our model, we are able to measure and compare the value of intelligence in a
unied framework. Specically, the value of intelligence under P-regret is the difference
22
Beliefs consistent with Condition 1 do not violate forward induction as M-types have the greater incentive
to send an out-of-equilibrium signal of A.
23
See the discussion in Dwight R. Lee, Free Riding and Paid Riding in the Fight against Terrorism, American
Economic Association Papers and Proceedings, 78 (1988), 226.
24
For example, a revolutionary organization, known as the 17 November, had an alleged arrangement with
the Greek government, whereby the terrorists directed attacks against non-Greek targets in return for sanctuary,
see The Economist, issue no. 1831 (London: The Economist, 1984). From 1975 until the summer of 2002, the
17 November operated with impunity, carrying out 146 attacks and twenty-two assassinations. A failed bombing
attempt on 22 June 2002 at the Port of Piraeus in Athens led to the rst-ever arrest for the group.
25
Overgaard, The Scale of Terrorist Attacks as a Signal of Resources.
26
Lapan and Sandler, Terrorism and Signalling; Overgaard, The Scale of Terrorist Attacks as a Signal of
Resources. In the former study, ex post regret occurred when conceding to a low-resource type that initially attacks
at a high (A) level.
582
ARCE AND SANDLER
between the governments payoff for conceding to a P-type, as occurs in equilibrium, and
its payoff for not conceding, as happens under complete information.
RESULT
1. The value of intelligence under P-regret is

A-pooling or a-pooling equilibrium occurs.
S, regardless of whether an
This result holds because the difference between not conceding or conceding to a P-type
is S in either pooling equilibrium. As S is partially determined by the governments public
stance towards concessions, it follows that a hard-line government is going to place greater
value on intelligence because concessions implicitly increase the cost of P-regret. This also
holds for terrorists bent on the annihilation of their targets, as S is commensurately high.
This justies US investments in intelligence and the creation of the DHS after 9/11. It is
also consistent with Israeli investment in intelligence because of its perpetual dealings with
militant terrorists who deny Israels right to existence.
Our model also identies a new type of regret: ex post M-regret, where the government
holds rm at either information set and is subsequently attacked in the second period by
M-types. In this equilibrium, Conditions 1 and 2 hold, implying that the prior
probability of an M-type must be low.27 It is clear that P[a, DD] P[A, DD] because
A a. In addition, M[a, DD] 2 R (1 )a 2 R (1 )A M[A, DD] requires
that
R [(1 )A (1 )a]/2( ).
(5)
This condition increasingly holds as the expected level of deterrence after an A-level
attack increases ( decreases), implying that if M-types expect a large response to a
rst-period attack, then they will rationally make an intertemporal substitution favouring
a second-period attack. This is a novel unintended consequence of terrorist deterrence
(hardening targets). For example, elsewhere we have examined the public aspects of
counter-terrorism policy and found that deterrence creates a public cost for those who do
not harden targets, resulting in inefciencies akin to the tragedy of the commons.28 Here,
(anticipated) deterrence does not actually eliminate attacks, but instead leads to strategic
intertemporal substitution of attacks, so that terrorists can catch the government less
prepared when launching their offensive.
The lm, The Battle of Algiers, poignantly depicts this escalating pattern of tactics,
which does not occur in prior signalling models. The Front de Liberation Nationale (FLN)
began with a policy of weeding marginal revolutionary elements drunks and prostitutes
out of the Casbah district, something the imperial French probably did not even interpret
as terrorism; i.e., a 0. Indeed, Hoffman argued that prior to the French execution (by
guillotine) of two FLN members, the terror campaign had been non-lethal by design
directed against inanimate symbols of French rule such as government ofces and
buildings, military cantonments and police stations, but not deliberately against people.29
This was followed by escalating tactics such as shooting police, bombing civilian locales
and conducting a general strike.30
As P-type have a payoff off the equilibrium path, R A vR, that is greater than its equilibrium payoff, these
beliefs do not violate forward induction.
28
Arce and Sandler, Counterterrorism.
29
Hoffman, Inside Terrorism, p. 62.
30
The lm is historically accurate since European civilians were only targeted after a bomb exploded in the
predominately Arab Casbah district (presumably by rogue French ofcials) in response to FLN activities against
French gendarmes.
27
583
A novel aspect of this pooling equilibrium is that Condition 2 places an upper-bound

restriction on terrorists resources for actions on the equilibrium path.31 Given limited
resources, M-types may rationally choose to attack at level a rather than A, and attack with
greater force (amassed resources) in the second period. The larger second-period attack
is also preferred because it does not induce the government to initially harden targets the
way an A-level attack would. This outcome is consistent with empirical evidence of
intertemporal substitution of attacks.
When Condition 5 holds, M-regret occurs under the auspices of an a-pooling
equilibrium. In contrast to P-regret, M-regret is dened in terms of the opportunity cost
of one of two forgone alternatives. First, under complete information the government
prefers to concede at node 4, rather than not concede. This is an intelligence concern
regarding incomplete information about the type of terrorists the government is facing;
here, the value of intelligence is the difference in the governments payoffs for conceding
(C) versus not conceding (D) at node 4; i.e., (2R a S). Under this form of M-regret,
the value of intelligence is now a decreasing function of S. A tough public stance against
terrorists is tantamount to a commitment to weather subsequent attacks by M-types.
Because R now enters into the value of intelligence, a policy of freezing assets (limiting
R) reduces this value of M-regret. For example, a great deal of ETA assets were frozen
following 9/11, thereby decreasing both the Spanish governments willingness to concede
to ETA and ETA attacks themselves. Any proactive counter-terrorism policy that curbs
terrorist resources (such as, destroying terrorist training camps, capturing terrorists or
inltrating groups) will also reduce the value of M-regret. Conversely, terrorists with less
restricted access to a large amount of assets require a commensurately larger amount of
intelligence (for example, Abu Nidal Organization in the 1980s). Thus, the Tamil Tigers
run a commercial shipping network, 95 per cent of which is estimated to be the transport
of legitimate commercial materials.32 An inability to freeze this source of income raises
the value of intelligence about the Tamil Tigers in lieu of M-regret. Insufcient
international proactive measures mean that R is high, so that M-regret leads to a higher
value of intelligence.33
Alternatively, a government might prefer to harden its targets at node 4, rather than
concede.34 This is a security concern. Hardening targets at node 4 results in a payoff of
replaces for hardened targets. The
G 2 R (1 )a, where discount factor
difference between the -based payoff and original -based payoff at node 4 is
( )(2R a), which establishes the degree of security concern. Determining which
form of regret is the greater forgone alternative is crucial for formulating counterterrorism
policy. To wit:
RESULT
2. M-regret is more of a security than an intelligence concern if S (2R a).
This result is novel because it gives a prescription for counter-terrorism policy to avoid
M-regret. If the inequality in Result 2 holds, then policy should be focused on hardening
31
Condition 2 holds for the A-pooling equilibrium with P-regret, but Condition 2 constrains the
governments belief at Ga, which is off the equilibrium path, and therefore met by 4 0, where no restriction
on R results.
32
Peter Chalk, Liberation Tigers of Tamil: EELAMs (LTTE) International Organization A Preliminary
Analysis, Commentary No. 77, Canadian Intelligence Service, Ottawa, Canada, 2000.
33
Such insufcient measures are identied by Todd Sandler, Collective versus Unilateral Responses to
Terrorism, Public Choice, 124 (2005), 7593.
34
We thank an anonymous referee for this suggested extension.
584
ARCE AND SANDLER
targets a security concern. For example, if the governments resolve is high, thereby
increasing S, then security should be commensurately raised regardless of the size of past
terrorist attacks (i.e., even in the absence of a spectacular). If, by contrast, the inequality
is reversed, then security is less of a policy concern than intelligence. Moreover,
intelligence should be focused on a judicious assessment of militant terrorists demands
to induce them to abandon violence. Indeed, as the left-hand side of the inequality in Result
2 is the value of information under P-regret, S, this result shows that such a focus runs
the risk of P-regret. Result 2 recognizes the trade-off between P-regret and M-regret at
information set Ga.
Finally, when Condition 5 is reversed, a separating equilibrium is possible where
M-types engage in an A-attack, P-types execute an a-attack, and the government does not
concede to either type. This corresponds to the Conditions 1, 2 and 5. In this
scenario, there is no regret because the government recognizes that M-types are making
the A-attack so that signalling acts as a perfect substitute for intelligence. Indeed, following
Bayess rule, we have 1 1 and 3 1.
Thus far, we have interpreted a policy of asset freezing as reducing R, for which the
Condition 5 for a separating equilibrium is increasingly met. Militants will attack more
heavily in the rst period, anticipating that their resources may be frozen thereafter.
Moreover, P-types will set a 0 so as to avoid having their assets frozen and maximize
political benets. If, in addition, M(A, DD) P(a, DD), then this separating equilibrium
captures the publicity rationale for terrorism. Many organizations (for example, PLO,
Hezbollah and Hamas) have turned militant because of difculty in creating recognition
of their cause through traditional political channels. If the government is not going to
concede, terrorism has the effect of greatly increasing public awareness.
This separating equilibrium and the a-pooling equilibrium with M-regret are essentially
two sides of the same coin. In anticipating a response, militants will either attack more
heavily in the rst period, as is the case in the separating equilibrium, or they will bide
their time and attack more heavily in the second period. Which side of the coin comes up
depends upon whether Condition 5 or 5 holds. As either condition is independent of the
governments public stance towards conceding (S), all that matters is the (anticipated)
reaction to an attack ( ) and the ability to reduce assets (R). The greater the level of
deterrence and, thus, the lower is , the more likely that Condition 5 holds, implying a
pooling equilibrium with ex post M-regret and escalating attacks. More successful terrorist
organizations are able to determine an effective level of violence that is at once tolerable
for the local populace, tacitly acceptable to international opinion and sufciently
modulated not to provoke massive government crackdown and reaction.35 In contrast, the
Tupamaros in Uruguay was a terrorist group whose level of violence was unacceptable for
the local populace and a government offensive destroyed them. The Italian Red Brigades
met a similar fate following the 17 December 1981 kidnapping of General James Lee
Dozier, the senior US ofcer at NATOs southern European command. Callous acts, such
as the 6 May 1978 murder of the former premier Aldo Moro, turned public opinion against
the Red Brigades. The trade-off inherent in Conditions 5 and 5 endogenously denes
the edge of brinkmanship as it relates to the escalating behaviour of militant terrorists.
If, moreover, is time-variant, then our result is indicative of Farias terror cycles, where
there is an inverse relationship between government deterrence (via law enforcement in
Faria) and terrorist activities.36 We offer no formal repeated-game analysis, but, by
35
36
See Hoffman, Inside Terrorism, p. 162.

Joao Ricardo Faria, Terror Cycles, Studies in Nonlinear Dynamics and Econometrics, 7 (2003), article 3.
585
extension, a non-stationary suggests two types of cycles through a state-dependent

determination of whether Condition 5 or 5 holds. This is consistent with the empirical
results that identied two cyclical components of terrorism: a high-activity and a
low-activity series which are likely by-products of intertemporal substitution of
resources.37 Terrorists high-activity series cannot be sustained, akin to the separating
equilibrium in our model. In contrast, the low-activity series can be escalated, again
consistent with an a-pooling equilibrium with M-regret. Previous signalling models were
not indicative of such empirical ndings.
The M-regret and separating equilibrium also share an important message about the
difference between successful counter-insurgency tactics and the resolution of terrorism.
In either case, military tactics reduce , but may buttress the equilibrium conditions under
which M-types attack in the second period. Defensive postures affect the magnitude, but
not the occurrence of signalling equilibriums with second-period attacks. This reinforces
the denition of terrorism in the opening of this article, particularly when terrorists goals
are religious/ideological. Tactical counter-terrorism policies that are orthogonal to these
goals do not temper terrorist actions, but instead encourage intertemporal substitution,
which then places a further premium on intelligence.
CONCLUDING REMARKS
In a recent paper, Hoffman and McCormick characterized terrorism as a signalling game

where target governments are ill-informed about terrorist groups objectives, resources,
and commitment.38 Given the short-term nature of most terrorist groups, with new groups
appearing each year and others splintering, governments are faced with the never-ending
chore of trying to assess the threat of terrorist groups under incomplete information. A
miscalculation of this threat can either mean that a government underestimates a groups
militancy and comes to regret its own resolve to hold rm, or else that a government fails
to recognize a groups political intent and comes to regret its concessions. The rise of
fundamentalist terrorism means that both militant and political groups are prevalent in the
post-Cold War era.39 This diversity in intent and resolve of terrorist groups means that
regret (i.e., responding inappropriately to terrorist demands) may have greater consequences for governments now than in the 1970s and 1980s when groups were more
homogeneous and less militant on average. Thus, the value of intelligence, which limits
regret, has increased in recent time.
By introducing a model that unies the existing signalling analyses of terrorism, our
article offers a framework that is more descriptive of the complex world of post-9/11
terrorism with militant and political terrorist groups co-existing. An important innovation
is to allow for defensive and proactive policies. Defensive actions can motivate
intertemporal substitutions by militant groups that strategically hold back on attacks to
catch a target government less aware. Proactive measures can reduce R and, thereby,
inuence the pooling and separating equilibriums. Government resolve, as reected by
high concession costs, also affects these equilibriums. We also give a characterization of
37
Enders and Sandler, Patterns of Transnational Terrorism, 19701999; Enders and Sandler, Transnational
Terrorism 19682000.
38
Hoffman and McCormick, Terrorism, Signaling, and Suicide Attacks, p. 244.
39
Hoffman, Inside Terrorism.
586
ARCE AND SANDLER
optimal (regret-minimizing) counter-terrorism policy that is based on the relationship

between terrorist resources and government resolve.
Our article demonstrates the trade-off between hardening of targets and intelligence.
Recent game-theoretic work showed that international co-operation to shore up weak links
(i.e., attractive soft targets) will be woefully inadequate owing to free-riding incentives.40
As a consequence, the value of intelligence remains high in the face of al-Qaedas global
network. Moreover, other recent work highlighted the inadequacy of proactive policies by
the international community to destroy terrorist assets with respect to global terrorist
networks.41 This, in turn, keeps terrorists resources high, thereby raising the value
of intelligence in a world besieged by heterogeneous terrorist threats. The inadequacy of
international co-operation in terms of defensive and proactive counter-terrorism elevates
the value of intelligence, given insufcient knowledge on the nature of the terrorist threat.
40
41
Sandler, Collective versus Unilateral Response to Terrorism.

Arce and Sandler, Counterterrorism.
Foreign Policy Analysis (2007) 3, 273294
CBRN Attack Perpetrators: An Empirical

Study
Kate Ivanova
The Ohio State University at Newark
Todd Sandler
Based on zero-inated negative binomial regressions applied to the
Monterey weapons of mass destruction data, this article assesses the
future risks from chemical, biological, radiological, and nuclear (CBRN)
terrorism. Once the threshold for CBRN attacks is surpassed, further
attacks arise: the expected number of CBRN incidents is over one and a
half times higher than past events. Religious cults and groups with a
transnational orientation pose the largest CBRN threat to society. Other
things constant, nationalists separatists and religious fundamentalists
are not more apt to engage in CBRN terrorism than compared to
other groups. Democratic and corrupt regimes are the likely venues
for CBRN incidents. Based on past incidents, rich countries are especially vulnerable to CBRN terrorism. Thus, recent actions by the U.S.
Department of Homeland Security to put more resources into guarding
against CBRN attacks appear sound. This study indicates that nonfundamentalist terrorists also present CBRN risks to democracies. From a foreign policy viewpoint, CBRN terrorism is not a problem that rich
democratic countries can confront alone, because the terrorists will
move to where there is the least vigilance. Our study indicates the likely
perpetrators and types of attacks that nations must cooperate to avoid.
Since the hijackings on September 11, 2001 (henceforth, 9 11) and the Tokyo
subway sarin attacks on March 20, 1995, there is a worry that terrorists will resort
to chemical, biological, radiological, and nuclear (CBRN) attacks (Roberts 2000;
Tucker 2000; Gressang IV 2001). Such attacks would provide a means for surpassing the media bar imposed by 9 11, where future terrorist incidents must be
sufciently catastrophic or costly to warrant media coverage beyond that of 9 11,
with its near 3,000 deaths. The U.S. Department of Homeland Security (DHS)
is taking the use of biological agents as a serious terrorist threat by allocating
Authors Note: Kate Ivanova is an Assistant Professor; Todd Sandler is the Vibhooti Shukla Professor of Economics
and Political Economy. The authors thank Gary Ackerman of the Monterey Institute of International Studies for
providing the WMD data. We also thank the School of International Relations, University of Southern California,
for funding data acquisition on rule of law and corruption. We have proted from the comments of three anonymous referees. This research was partially supported by the U.S. Department of Homeland Security (DHS) through
the Center for Risk and Economic Analysis of Terrorism Events (CREATE) at the University of Southern California,
grant number N00014-05-0630. However, any opinions, ndings, and conclusions or recommendations are solely
those of the authors and do not necessarily reect the views of the DHS.
2007 International Studies Association.
Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.
274
CBRN Attack Perpetrators
billions of dollars to Project BioShield that stockpiles vaccines to counter a biological attack (US [DHS] 2005). DHS Secretary Michael Chertoff stated that defense against CBRN terrorism and other potentially devastating terrorist incidents
is an essential priority of the DHS budget in the near-term (Chertoff 2005).
Terrorist experts, however, disagree about the threat posed by CBRN terrorism. One group of experts stresses a host of deterrents to the use of CBRN weapons that include losing constituency support and funding, drawing a massive
retaliation (e.g., U.S. actions against the Taliban and al-Qaida after 9 11), surmounting the weaponization hurdle, accepting the handling risks, and ignoring
the cost-effectiveness of conventional terrorist attacks (Rapoport 1999; Dishman
2001; Enders and Sandler 2006: 251252). For example, Rapoport (1999) indicates that, on a per-incident basis, conventional terrorist attacks kill more people
than CBRN attacks.1 Another group of experts highlights factors that promote
such attacks. These factors include the availability of information and expertise,
heightened frustrations of terrorists, demonization of a target population, deepseated grievances of perpetrators, and the possession of a millenarian, apocalyptic, or messianic vision (Vegar 1998; Roberts 2000; Simon and Benjamin 2000;
Blum, Asal, and Wilkenfeld 2005; Enders and Sandler 2006:253).
Experts also differ on the likely perpetrator of CBRN incidents if such attacks
were to take place. Many researchers characterize religious cults and religious
fundamentalists as the likely users of CBRN weapons, particularly when these
groups address an ethereal audience, emphasize hatred of nonbelievers, and display an inapposite relationship (see, especially, Gressang IV 2001; but also see
Hoffman 1995; Betts 1998; Cameron 1998; Dishman 2001; Palfy 2003; Post
2005). In contrast, other researchers argue that nationalists separatists and other
secular actors (including loners) presented the greatest CBRN risk in the past
and will likely present the largest such risk in the future (Rapoport 1999; Tucker
2001; Sinai 2005). In many ways, assessing CBRN risks and the likely perpetrators
is an empirical question that requires studying past events, because there are
compelling arguments on both sides of these debates.
The primary purpose of this paper is to apply statistical inferential procedures
to ascertain the likely perpetrators of CBRN terrorist attacks, based on data on
CBRN incidents collected by the Monterey Institute of International Studies
(2005). Although we suggest some logically drawn hypotheses, our main task is
to ascertain which side of competing hypotheses in the literature is supported by
the data gathered to date on CBRN incidents. In addition, we determine if past
CBRN incidents are a determining factor of future attacksthat is, does the past
portend the future for CBRN attacks? We also investigate whether a terrorist
groups transnational orientation supports its proclivity to employ CBRN attacks.
For each class of potential perpetrators, we relate regime characteristics (i.e.,
democracy, rule of law, and corruption) to its likely use of CBRN weapons in terrorist attacks. We nd that, among groups, religious cults pose the greatest
CBRN threat to date. Other things constant, a transnational orientation (i.e.,
engaging in transnational terrorist attacks) also increases a groups reliance on
CBRN attacks. Past CBRN incidents increase the likelihood of future CBRN
attacks for all perpetrators as a group and nationalists separatists as a cohort.
For each type of perpetrator, democracy increases the risks of CBRN attacks,
while corruption also heightens this risk. Wealth, as measured by income per
capita, augments the likelihood of CBRN incidents. These ndings can inform
governments about likely threat and perpetrators of CBRN attacks.
The current study differs in a number of ways from a recent paper by Ivanova
and Sandler (2006) that also relied on the Monterey Institutes weapons of mass
1
Ivanova and Sandler (2006) note that the average conventional terrorist incident killed one person, while the
average CBRN attack killed just a half a person.
Kate Ivanova and Todd Sandler
275
destruction (WMD) dataset (henceforth, called Monterey WMD data). This earlier study primarily presented odds ratio tests to investigate correlates to CBRN
attacks; the current study presents a variety of regressions that explain the variation in CBRN attacks. Unlike the earlier study, the current paper identies
inuences on various cohorts of potential CBRN terrorists. For example, we indicate how regime characteristics affect a cohorts likely use of CBRN weapons. In
addition, the current study investigates the underlying dynamics of CBRN attacks
by ascertaining how past CBRN incidents affect current CBRN incidents. Each
cohort of perpetrators is analyzed separately, thereby displaying how regime
characteristics can impact types of perpetrators differently.
The body of the paper contains ve sections. In the rst section, essential denitions and concepts are given, along with a discussion of the datasets and variables. Justications are also indicated for examining CBRN incidents in isolation
from traditional terrorist incidents. The second section puts forward the six
empirical hypotheses that underlie the empirical study. The relationship between
group type and CBRN terrorism is investigated in the third section. Following
the presentation of the statistical model, we provide and discuss the statistical
results. For alternative cohorts of perpetrators, we investigate the inuence of
regime type, country wealth, and past CBRN terrorist incidents on current CBRN
incidents in the fourth section. Conclusions and policy implications are drawn in
the nal section. Our study is in the spirit of Ackermans (2005:141) recommendation for careful empirical analysis of past CBRN incidents to identify potential
terrorists and the factors that may determine their use of CBRN terrorism. Such
an exercise can inform intelligence and law enforcement agents, while helping
to formulate public policy.
Denitions, Datasets, and Variables
subnational groups against noncombatants to obtain political or social objectives
through intimidation of a large audience beyond that of the immediate victim.
The presence of a political or social motive is a key ingredient of terrorism. In
contrast, criminal actsfor example, kidnappings for ransom, murder, or extortionare not terrorist acts when there is no political or social agenda. Our denition excludes state terror by identifying the terrorists as individuals or
subnational groups. Noncombatants are viewed as targets of terrorism, so that
roadside bombs against an occupying military force are not classied as terrorist
events. To pressure a targeted country, terrorists try to create a general atmosphere of anxiety where everyone feels at risk. If terrorist attacks appear to be
random, then this elevates fear and a sense of general vulnerability. Governments then must guard everywhere to reassure citizens that they are safe. By
resorting to mass-casualty terrorism (e.g., 9 11), terrorists achieve even greater
anxiety that necessitates more elaborate and expensive countermeasures. Even a
suggestion of a CBRN attack cajoles a liberal democracy, entrusted with protecting lives and property, to spend massive amounts on homeland security to counter such attacks. Thus, there are circumstances where some terrorists may resort
to such unconventional measures despite inhibitors, mentioned earlier.
Terrorist attacks are also distinguished by their national international implications. Domestic terrorism is homegrown with consequences for just the host
country, its institutions, citizens, property, and policies. For domestic terrorism,
the victims, perpetrators, and audience are all from the venue country. By these
criteria, the anthrax letter attacks following 9 11 was domestic terrorism, since
the unknown terrorist appears to have been a U.S. citizen and the other criteria
for a domestic incident are met. In contrast, transnational terrorism involves
perpetrators or victims from two or more countries and has international
276
implications. The Madrid commuter train bombings of March 11, 2004 represent
a transnational terrorist incident because the perpetrators were foreign, as were
some of the victims. The 9 11 hijackings were transnational terrorist incidents,
whose nancial implications were felt on stock markets worldwide (Chen and
Siems 2004). Moreover, 9 11 involved foreign perpetrators whose attacks harmed
victims from over 80 countries.
At the outset, we must be clear about the relationship between CBRN and
WMD terrorism. The terrorism literature has in a misleading fashion characterized WMD terrorism as terrorist events employing any mine, bomb, or device
that releases chemicals, biological agent, or radiation in sufcient amount to
cause deaths (Bunker 2000; Blum et al. 2005). There is no requirement in the literature that mass casualties must result; the mere use of a CBRN device is sufcient to qualify as WMD terrorism. In practice, CBRN terrorism may kill or
injure many or few and, to date, have killed few. The anthrax letters in the United States in 2001 murdered 5 and sickened 22 individuals, while the sarin attack
on the Tokyo subway killed twelve and sickened 1,038 people. Although the
Monterey WMD data equates CBRN and WMD incidents, as does much of the literature, we resist this practice and do not refer to CBRN incidents as WMD
events. Rather, we refer to CBRN incidents when CBRN substances are sought
after, acquired, or used for a terrorist attack.
To date, much larger casualty totals have been associated with some conventional terrorist events (e.g., 9 11 and the bombings of the U.S. embassies in
Kenya and Tanzania on August 7, 1998). Nevertheless, it is important to analyze
CBRN terrorist incidents, as they have the potential to involve large numbers of
casualties and cause billions of dollars in damage (i.e., a dirty bomb in a densely
populated city). Most conventional terrorist attacks do not have the same potential to cause mass casualties or signicant long-term expenses from cleanup. The
study of CBRN incidents as a separate phenomenon provides insights as to perpetrators and likely venue, such as rich liberal democracies. If CBRN and standard terrorist incidents are combined into a single dataset, then the
distinguishing characteristics of CBRN eventsfor example, the marginal impact
of yesterdays CBRN incidents on todays incidentswill be lost to the analyst.
These specic features can inform public policyfor example, DHS efforts to
redirect resources to guarding against CBRN attacks.
The Monterey WMD terrorism database tracks politically and criminally motivated incidents by substate actors that involve the acquisition and or deployment
of CBRN agents since 1900. Because we are only interested in the application of
CBRN materials for terrorist purposes, we apply rigorous criteria for the inclusion of CBRN incidents in our investigation. First, we include incidents from
1988 to 2004, because before 1988 CBRN incidents were relatively rare so that
there is little variation in CBRN events to explain by inferential statistics. Second,
we cull criminally motivated incidents (classied as Type II in the Monterey
WMD data) that do not constitute terrorism. Third, we only include those events
that involve: (i) the actual use of CBRN substances by the terrorists; (ii) a CBRN
threat combined with possession (or simply possession); and (iii) attempted
CBRN acquisitions supported by substantial evidence. All plots only instances,
where the perpetrators never took steps to acquire the CBRN substances are
culled from the data. Moreover, hoaxes, pranks, and threats are also removed. If
the terrorists claimed to have used CBRN material but no such substance was
used, the incident is a prank. When a similar claim is accompanied by a fake substance, the act is a hoax. Cases, where CBRN use is threatened but there is no
evidence of possession, attempted acquisition, or execution, are termed threats.
Such incidents are removed from our sample, because they do not really represent a CBRN risk even though they may result in inconvenience and costs. Thus,
we only maintain about 30% of the Monterey WMD incidents.

TABLE 1.
277
Descriptive Categories for Sample Drawn from Monterey WMD Terrorism Database
Category
Subcategory
Incidents
Region
Asia
Australia and Oceania
Europe
Latin America
Middle East and North Africa
Russia and newly independent states
sub-Saharan Africa
United States and Canada
Worldwide
Biological
Chemical
Combination
Nuclear
Radiological
Unknown
Criminal organization
Left-wing
Lone actor(s)
Nationalists separatists
Religious cults
Religious fundamentalists
Right-wing
Single-issue
Unknown
Aerosol spray
Casual personal direct contact
Consumer product tampering
Explosive device
Food drink
Injection projectile
Jug jar canister
Letter package
Not applicable (case of possession)
Reaction device
Water supply
Ventilation system
Unknown
98
7
44
16
20
29
12
85
3
42
205
7
8
26
26
1
29
23
66
28
28
9
21
108
19
42
18
27
22
19
13
46
45
3
12
1
47
Type of agent
Type of group perpetrator
Type of delivery
Table 1 categorizes our 314-event sample by geography, type of agent (substance), type of perpetrator, and delivery system. Asia and North America (the
United States and Canada) experienced the greatest incidence of CBRN terrorism for the sample period, followed by Europe. The remaining areas were associated with many fewer CBRN events. The most common CBRN agent was
chemical substances (205 incidents), which account for almost two-thirds of all
sample incidents. Biological events are second with 42 instances that include two
unsuccessful attempts by Aum Shinrikyo to sicken people with anthrax. Radiological events (26) involve serious efforts by terrorists to obtain radiological
substances, as well as dirty bombs by Chechen rebels that did not explode. The
eight nuclear events mostly involved al-Qaidas efforts to acquire enriched
uranium or Chechens actions to secure nuclear material or nuclear devices from
ex-Soviet facilities. In the latter case, the evidence is mixed as to whether the
Chechens ever obtained a suitcase bomb or an SS-20 missile. Perpetrators
include a variety of terrorists: unknown perpetrators are associated with 108 incidents or over a third of the sample. Nationalists separatists engaged in 66 events,
278

TABLE 2. Basic Statistics According to Group Identity (19882004)
Nationalists
Separatists
Number of groups
Number of transnational groups
Number of incidents
Mean
Standard deviation
Min
Max
Number of injuries
Mean
Standard deviation
Min
Max
Number of fatalities
Mean
Standard deviation
Min
Max
Religious
Cults
Religious
Fundamentalists
Others
All
18
11
55
3.06
4.75
1
20
58
3.22
11.97
0
51
38
2.11
5.61
0
21
2
0
28
14.00
18.38
1
27
11921
596.00
842.87
0
1192
8183
409.00
521.84
40
778
14
8
22
1.57
1.34
1
6
0
0.00
0.00
0
0
3054
21.79
81.23
0
304
21
6
56
2.67
3.83
1
18
201
9.57
27.65
0
121
39
1.86
6.23
0
28
55
25
161
2.93
4.92
1
27
14512
26.38
161.15
0
1192
12005
21.82
111.77
0
778
With one outlier removed, total injuries for religious cults equal 153 with a mean of 76.5, standard deviation of
108.19, and maximum of 153.
With one outlier removed, total injuries for all groups equal 412 with a mean of 7.49, standard deviation of 27.27,
and maximum of 153.
3
With one outlier removed, total deaths for religious cults equal 40. Since only one group then remains, the mean
and maximum are 40.
4
With one outlier removed, total deaths for religious fundamentalists equal 1 with a mean of 0.08, standard deviation of 0.28, and maximum of 1.
5
With two outliers removed, total deaths for all groups equal 118 with a mean of 2.23, standard deviation of 7.34,
and maximum of 40.
2
while religious fundamentalists and cults together executed 56 CBRN incidents.

Left-wing terrorists are associated with 29 CBRN incidents. Finally, Table 1 indicates the various delivery devices in which unknown (47), letter package (46),
and contact (42) garnered the highest frequencies.
Table 2 reports basic statistics for all identied groups for 19882004.2 Groupwise data are subdivided into ve cohortsnationalists separatists, religious cults,
religious fundamentalists, other groups (e.g., leftists), and all sample groupsto
showcase differences. In the top row, the number of groups for each cohort is
indicated. The second row reports the number of transnational groups for each
category. Table 2 also lists the number of incidents, the number of injuries, and
the number of fatalities associated with CBRN activities by group cohorts. For
each of these event characteristics, we report the mean, standard deviation, minimum (min) value, and maximum (max) value over the entire period.
According to Table 2, groups participating in CBRN events included 18
nationalists separatists, two religious cults, 14 religious fundamentalists, and 21
other groups. Over half of the nationalists separatists (11) and religious fundamentalists (8) engaged in some transnational terrorist attacks, while less than a
third of other groups (6) had perpetrated transnational terrorist attacks.
Although nationalists separatists and other groups had been responsible for twothirds of CBRN sample incidents, religious cults had by far the highest mean
(14). Of the 28 incidents, involving cults, Aum Shinrikyo was implicated in all
but a single incident, which was perpetrated by the Movement for the Restoration of the Ten Commandments of God, a doomsday cult in Kanungu, Uganda.
2
Incidents involving unknown perpetrators or lone actors are not covered in these statistics.
279
Before a couple outliers are removed, cults were responsible for the largest number of casualties for the sample period1,192 of 1,451 injuries and 818 of 1,200
deaths. After the removal of one injury incident and one death incident,3 these
gures drop to 153 of 412 injuries and 40 out of 118 deaths. For religious fundamentalists with the removal of an outlier, deaths drop from 305 to just 1.4 Generally, CBRN incidents by religious cults and other groups involved the largest
number of casualties, while these incidents by religious fundamentalists are likely
to result in very few casualties, especially with the Nigerian outlier (see footnote
4) removed. We, however, keep the three outliers in the regression, because the
unit of analysis is the number of incidents perpetrated by the groups and not
the number of associated casualties.
Based on the Monterey WMD data, Figure 1 displays the annual number of
CBRN terrorist events by group type for 19882004. These time series exclude
criminal and unsubstantiated incidents, as described earlier. For the overall
series, the two most prominent peaks in CBRN activity took place in 1995
and 2000. The former peak with 25 incidents coincided with increases in CBRN
terrorists by cults, other groups, and nationalists separatists, with cults being the
largest contributor. The 2000 peak is primarily due to a rise in CBRN terrorism
by nationalists separatists. Cycles appear to characterize CBRN events.
30
All
Nationalists/separatists
Cults
Fundamentalists
Other
Number of incidents
25
20
15
10
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
FIG. 1. Annual Number of CBRN Incidents by Group Type, 19882004.

3
The injury incident is the Tokyo subway sarin attack on March 20, 1995 by Aum Shinrikyo; the death incident
is the mass poisoning on March 17, 2000 of the followers of the Movement for the Restoration of the Ten Commandments of God. The Tokyo attack involved 1,039 injuries while the mass poisoning included 778 deaths.
4
The outlier is the massacre of Hausa military youths in Nigeria on February 21, 2000 where 304 died, some by
arrows tipped with poison.
280

Other Data and Variables
To capture the relationship between perpetrators and regime characteristics, we,

in part, utilize annual data drawn from the Polity Project, Political Regime
Characteristics and Transitions, 18002003 (Marshall and Jaggers 2004). Polity
data are gathered by the Integrated Network for Societal Conict Research (INSCR) at the University of Maryland. The Polity database is constructed on the premise that a political system does not have to be represented as either democratic
or autocratic. Thus, INSCR treats democracy and autocracy as two dimensions
that can be measured independently. According to Polity, democracy reects
three interdependent elements: (1) institutions and procedures that foster political participation, (ii) procedural constraints that curb executive power, and (iii)
government-backed guarantees that protect civil liberties (e.g., freedom of association, freedom of speech, protection against unwarranted search and seizure,
and due process under the law). Each of these three elements are assigned subjective codes that are then combined into an overall indicator between 0 and 10,
with higher values associated with more democracy. In contrast, autocracy
involves restraints on political participation, few limits on executive power, and
signicant restrictions on civil liberties. Subjective scores assigned to these three
factors are also aggregated into a single index that varies between )10 and 0,
with lower values indicative of more autocratic rule. An overall composite is
derived by summing the democracy and autocracy indicators. This democracy
composite score ranges from )10 to 10 with higher values reecting democratic
principles. Given Politys coverage only up through 2003, the democratic indicator is not available for 2004.
For 19982004, we rely on the International Country Risk Guide (ICRG),
produced by the Political Risk Services (PRS) Group (2004), for two additional
regime characteristics: rule of law and honesty (or the absence of corruption).
The ICRG index of law and order (i.e., rule of law) is based on two subcomponents: (i) the impartiality of the legal system; and (ii) peoples observance of the
law.5 The second component is needed because a country with a high judicial
system rating may still suffer from high crime rates and routine violation of the
law. The rule of law variable is scaled from 0 to 6, where higher scores reect
strong rule of law and lower scores indicate a tradition of depending on physical force or illegal means to settle claims (Knack and Keefer 1995:225). The
ICRG corruption index primarily measures the extent to which high government ofcials are likely to demand special payments (Knack and Keefer
1995:25), but it also accounts for illegal payments associated with import and
export licenses, exchange rate transactions, tax assessments, policy activities, or
loans. Like the rule of law index, the corruption indicator ranges from 0 to 6,
with low values indicating corrupt regimes. We will, however, employ high values
to reect honest regimes with scrupulous government ofcials. Annual values of
the rule of law and honesty indices are available for 19882004.
A nal variable is an annual wealth measure for venue countries associated
with CBRN incidents. Income per capita data come from the World Bank Group
(2006).
Empirical Hypotheses
To underline the empirical investigation, we present six hypotheses. These hypotheses are either drawn from the literature or else are logically deduced. The
rst hypothesis involves the temporal nature of CBRN incidents. Technological
innovations diffuse through the terrorism community owing to linkages among
5
See International Country Risk Guide (2005) (ICRG) for denitions for these components.
281
terrorist groupsthat is, groups are known to share information and tactics.
Thus, the discovery of a novel form of attack by one group may be passed along
to other groups. In some cases, the media greatly facilitate this transmission by
making the method of attack public. Terrorists can then search libraries or the
Internet for the necessary technical information to carry out the attack in practice. When the same group is involved in multiple attacks, as was true for Aum
Shinrikyo, economies of scale (i.e., falling unit costs with incidents) then make
future CBRN attacks cheaper per incident once setup costs have been met.
These setup costs include surpassing weaponization barriers, building a laboratory, obtaining the substances, acquiring knowledgeable personnel, and establishing the requisite infrastructure. Owing to these factors, todays CBRN events are
anticipated to be positively inuenced by yesterdays events, so that CBRNt (i.e.,
events in period t) is positively inuenced by CBRNt)1 (i.e., events in period t )
1). This relationship may also hinge on learning economies that also lower unit
costs due to experience gained from past actions. Another positive aspect of yesterdays incidents on todays actions stems from crossing the psychological and
technical threshold that yesterdays CBRN incidents may signal. Thus, we have:
Hypothesis 1:
Past CBRN incidents are an important positive determinant of todays CBRN incidents
As mentioned at the outset, the views on likely perpetrators of CBRN incidents
are controversial with two contrasting predictions in the literature. One group of
experts sees religious cults and fundamentalists as more apt to engage in CBRN
attacks than other groups, because these religious factions may demonize their
enemies, appear less restrained in their actions, view all nonsupporters as legitimate targets, and not maintain a constituency (see, e.g., Betts 1998; Cameron
1998; Dishman 2001; Palfy 2003). In the case of cults, leaders may be pursuing
millenarian, apocalyptic or messianic visions that justify any number of casualtiesfor example, Aum Shinrikyos apocalyptic redemption (Blum et al. 2005).
One set of experts emphasizes such factors as promoting CBRN terrorism with
its greater carnage potential in the case of religious terrorists. In contrast, other
experts view opportunistic nationalists separatists or others as a potential threat
(e.g., Sinai 2005), while still others do not envision CBRN terrorism as appealing
to nationalists separatists owing to powerful inhibitors, that includes the benetcost effectiveness of conventional terrorism (Rapoport 1999). Monetary support
from a Diaspora may inhibit nationalists separatists from CBRN attacks that may
alienate their funders. Quite simply, there is no agreement in the literature as to
whom are the likely perpetrators of CBRN attacksit is an empirical question
owing to opposing factors. As a refutable hypothesis, we offer:
Hypothesis 2:
Religious cults, followed by religious fundamentalists, are more prone to CBRN attacks
against nonbelievers than other groups
We place cults ahead of fundamentalists because the latter terrorists have better
dened political goals (e.g., an Islamic state) that may make them possess some
constituency concerns.
A third hypothesis involves terrorist groups that engage in one or more transnational terrorist events.6 Transnational terrorist groups can draw expertise
and funding from abroad, thereby putting CBRN terrorism within their reach.
6
Transnational orientation is ascertained by examining International Terrorism: Attributes of Terrorists Events
(ITERATE) for CBRN perpetrators, who executed at least one transnational terrorist acts (Mickolus, Sandler, Murdock, and Flemming 2005).
282
Moreover, these transnational groups may be in a better position to obtain

CBRN substances from laboratories and other facilities abroad (Blum et al.
2005). Given their transnational orientation, such groups can stage a CBRN
attack away from their home country, so that their nationals will not be in
harms way. Thus, foreign venues may make the associated risks more acceptable.
Transnational group may also execute large-scale, newsworthy CBRN attacks to
gain worldwide media attention. Given past incidents like 9 11 and the Madrid
commuter train bombings, transnational terrorists must ratchet up the carnage
to command similar media attention. Transnational terrorist groups are in a
more competitive news market than domestic terrorists and this induces the
former to seek more ghastly actions. Such considerations lead to:
Hypothesis 3:
Groups with a transnational orientation are more prone to engage in CBRN attacks
The next three hypotheses involve the likely venue for CBRN terrorism. There is
a growing literature that views democracy as encouraging terrorism owing to
freedom of association, availability of information, sources of funding, rights to
privacy, protection under the law, targets of opportunity, and restraints on government (see, e.g., Eubank and Weinberg 1994, 2001; Weinberg and Eubank
1998; Enders and Sandler 2006). Democracies also provide potential media coverage that terrorists seek. The same factors that support conventional terrorism
also provide a favorable environment for CBRN terrorism in democracies. This is
particularly true for CBRN incidents owing to a knowledge base (through
higher-learning institutions and laboratories), protection from unwarranted
searches, and myriad funding opportunities. Moreover, the shear volume of shipping in most rich democracies offers opportunities for CBRN ingredients to
enter ports undetected. These risks of CBRN incidents are augmented by the volume of tourism and business travelers to democracies. Hypothesis 4 indicates
that the above considerations make democracies a likely venue for CBRN terrorist attacks.
Hypothesis 4:
Democratic values and the rule of law are conducive to the staging of CBRN attacks
Following 9 11, the Interpol chief, Ronald K. Noble (2001), stated that, The
more sophisticated security systems, the best structures, or trained and dedicated
security personnel are useless, if they are undermined from the inside by a
simple act of corruption. Corruption can foster CBRN terrorism by allowing
terrorists to acquire the material through bribes of ofcials or individuals at
sensitive laboratories. The presence of corruption also means that the acquisition
of CBRN substances may go unnoticed and or unreported owing to questionable
record-keeping practices. Corrupt businesses may sell essential ingredients to
terrorists that can be used to assemble a CBRN weapon. Such considerations
give:
Hypothesis 5:
Corrupt (honest) regimes are more (less) likely to experience CBRN incidents
A nal hypothesis concerns the wealth of potential venue countries as measured
by the natural log (Ln) of the countrys income per capita. Rich countries are
apt to be the venue for CBRN terrorism, insofar as these attacks are likely to
draw more attention in wealthy than in poor countries. If the terrorists are after
a ransom, then wealthier countries present greater extortion possibilities. Rich
countries also possess more laboratories and research facilities where CBRN
283
substances are available. Additionally, there are more individuals with access to
and knowledge of CBRN materials in wealthy countries. Funds are more readily
available in rich countries to support CBRN weapon acquisition. Thus, we have:
Hypothesis 6:
Rich countries are a more likely venue for CBRN terrorism

Group Type and CBRN Terrorism
We rst investigate the determinants of CBRN terrorism, based on past attacks
and group characteristics. To construct our dependent variable, we calculate the
number of CBRN incidents in period t, CBRNt, perpetrated by each identied
group. The dataset of 55 terrorist groups excludes loners and unknown perpetrators (see Table 2). We assume that a groups count of CBRN incidents either start
from the year of their rst incident, or from 1988 if its CBRN operations predated
the start of our sample period. Thus, we implicitly assume that the groups rst
CBRN incident indicates its genesis or its ability to employ CBRN substances for
terrorist acts. Because terrorist groups may not exist or use CBRN agents at the
beginning of the sample period, the number of years varies among groups.
The dependent variable consists of the number of CBRN terrorist incidents
per year, which is characterized by a preponderance of zeros and small values.
The standard model for thin count data is a Poisson regression (Cameron
and Trivedi 1998:3; Greene 2003:740). However, a shortcoming of a Poisson
regression is that the conditional mean of the dependent variable is assumed to
equal its conditional variance. If this underlying distributional assumption fails
to hold (a likely scenario), then the coefcient estimates may be consistent, but
their standard errors will be underestimated. A negative binomial regression generalizes the Poisson regression and permits greater variation (overdispersion),
not constrained to equal the mean.
The negative binomial regression assumes, for a given set of regressors, that
yitthe number of CBRN incidents perpetrated by group i in year t in our
modelis distributed with a probability density function:

a1
yit
Cyit a1
a1
lit
;
f yit jxit
Cyit 1Ca1 a1 lit
a1 lit
with mean parameter lit expx0it b in which b is a vector of coefcients to be

estimated. In equation (1), a is the dispersion parameter. This model implies
that the conditional mean is given by:
lit expb0 b1 Nationalistsit b2 Cultsit b3 Fundamentalistsit b4 Transnationalit :
2
In equation (2), Nationalistsit refers to a dummy variable that equals 1 if the
perpetrator is classied as a nationalist separatist group in the Monterey WMD
data and 0 otherwise. Similarly, Cultsit and Fundamentalistsit denote dummy variables for religious cults and fundamentalists, respectively, with all other groups
used as the reference category. Finally, Transnationalit equals 1 if the group has a
transnational orientation and equals 0 otherwise. Maximum-likelihood methods
are applied to estimate the negative binomial regression model.
We assume that observations from different years for the same group are correlated, whereas any two observations from different years for alternative groups
are independent. To account for this correlation without assuming any particular
284
within-group correlation or form of heteroscedasticity, we use a robust variance

estimator clustered over groups. The estimator allows for heteroscedastic variance between and within groups (Williams 2000:645). An advantage of this variance estimator is that the nature of the within-group dependence does not have
to be specied. As a consequence, estimations are robust not only to heteroscedasticity, but also serial correlation.
The interpretation of coefcients for the negative binomial is less straightforward than a linear regression model, for which estimated coefcient bj means
that a one-unit change in the jth explanatory variable increases the expected
value of the dependent variable by bj units. Taking the natural log of the conditional mean and differentiating with respect to xj, we obtain:
bj
@Eyjx 1
;
@xj Eyjx
which is the percentage change in the dependent variable owing to a one-unit

change in the jth explanatory variable. As such, equation (3) is a semielasticity.
If, however, an explanatory variable enters logarithmically, then the associated
coefcient is a full elasticity giving the ratio of percentage change in the dependent variable to the percentage change in the independent variable. For indicator
(dummy) variables, it is convenient to interpret the coefcients transformed to
incidence rate ratios. For the negative binomial model, the incidence rate ratio
for a one-unit increase in indicator variable d, with all of the other variables (x2)
held constant, equals
Eyjd 1; x2
expbj :
Eyjd 0; x2
This indicates that the expected count (or incidence rate) of an event is exp bj
times larger if the indicator is unity rather than zero. For a continuous variable,
this would correspond to a one-unit increase.
Results
Table 3 presents the estimates of equation (2) with standard errors in
parentheses. Models 1 and 2 have 433 observations for 55 terrorist groups for
19882004. In contrast, Models 3 and 4 have just 378 observations, because 55
observations are lost by lagging CBRN. To test between the negative binomial
and Poisson regressions, we focus on the dispersion parameter a. For all four
models, we reject the hypothesis that the dispersion parameter is zero at the .01
level, so that the negative binomial model is appropriate. The Wald test indicates
that the overall model is signicant at the .01 level.
Models 3 and 4 include CBRNt)1, which allows us to test Hypothesis 1, while
controlling for potentially relevant but omitted variables. CBRNt)1 is highly signicant in both models, thus indicating that, for each group, the expected number
of CBRN incidents is over one and a half times higher than that in the pervious
year. This nding strongly supports Hypothesis 1. The chi-squared statistic with
one degree of freedom for the likelihood ratio test to compare Model 1 and 3 is
295,7 which is signicant at the .01 level indicating a much better t for Model 3
than for Model 1. A similar calculation supports Model 4 over Model 2; hence,
our remarks are focused on the coefcients in Model 3 and 4. Comparing coefcient estimates, we see that the models display reasonable robustness.
Because most of the independent variables are indicator variables, the coefcients are transformed to incidence rate ratiosthat is, exp bj. For model 3, the
7
This statistic equals 2 |)317.92 + 170.12|.
285

TABLE 3.
Negative Binomial Regressions (Standard Errors Adjusted for Clustering on Terrorist

Groups) (19882004)
Model 1
Model 2
Model 3
Model 4
1.61*** (0.13)
1.62*** (0.13)
CBRNt-1
Nationalists separatists
1.05 (0.44)
1.53* (0.36)
1.22 (0.70)
0.76 (0.70)
Religious cults
7.90*** (2.85) 9.10*** (3.27) 11.07*** (6.22)
9.33*** (5.32)
Religious fundamentalists
0.73 (0.30)
1.15 (0.48)
0.47 (0.29) 5.80E-07*** (4.37E-07)
Transnational groups
2.82*** (0.92) 3.81*** (1.97) 6.28*** (3.53)
4.80** (3.62)
Nationalists transnational
0.56 (0.36)
1.83 (2.10)
Fundamentalists
0.48 (0.35)
1.02E+06*** (1.05E+06)
transnational
a
2.15***
2.12***
2.81***
2.81***
Wald test (v2)
45.64***
46.17***
112.78***
969.69***
Log-likelihood
)317.92
)317.10
)170.12
)169.43
Observations
433
433
378
378
Note: Dependent variable is the number of CBRN incidents per year. Coefcients are transformed to incidence-rate
ratios [i.e., exp(b) rather than b]. Standard errors (in parentheses) are similarly transformed. The constant is not
shown.
*Signicant at the .10 level.
**Signicant at the .05 level.
***Signicant at the .01 level.
expected number of CBRN incidents for nationalists separatists and fundamentalists is not signicantly different than that for all other groups.8 In Model 3,
the expected number of CBRN incidents for religious cults is over 11 times
higher than that for all other groups. Moreover, this coefcient is signicant at
the .01 level, thus partly supporting Hypothesis 2. The same general message
comes from Model 4 regarding religious cults being much more prone than the
comparison group to engage in CBRN terrorism. In Model 3, the coefcient on
transnational orientation indicates a six time greater likelihood than the comparison group to engage in CBRN attacks. Thus, Hypothesis 3 is supported.
In Model 4, we add transnational interaction terms for nationalists separatists
and for fundamentalists to ascertain whether such an orientation has any inuence on the use of CBRN terrorism by these two types of groups. We do not
include an interaction with cults since neither sample cult is classied as transnational. The coefcient on the nationalists interaction term is insignicant. This
suggests that nationalists separatists with a transnational orientation do not get
more or less involved in CBRN terrorism. Although the expected number of
CBRN incidents for fundamentalists is much lower than that for the comparison
group in Model 4, a transnational orientation slightly increases the anticipated
use of CBRN terrorism by fundamentalists.
Regime and Group Type: Their Inuence on CBRN Terrorism
Next, we investigate whether regime characteristics and country wealth affect
four perpetrator cohorts use of CBRN substances in terrorist acts. These cohorts
include all perpetrators, nationalists separatists, religious cults and fundamentalists, and all other actors. Unlike the last section, all other actors refer not only to
terrorist groups that do not belong to one of the three group categories, but also
to lone and unknown actors (see Table 1 where there are 23 lone and 108
unknown perpetrators). We combine cults and fundamentalists into a single
cohort, because there are only two cults. By subdividing perpetrators, we can
8
All other groups involve groups that are not nationalists separatists, cults, or fundamentalists.
286
determine whether regime characteristics, past CBRN incidents, and wealth

affect the classes of perpetrators differently. Regime characteristics include
democracy, rule of law, and honesty indices described earlier. The ensuing
empirical investigation allows us to test Hypotheses 1, 46.
To explain the variation in the number of CBRN incidents for the various
cohorts based on regime characteristics, we compute the number of CBRN incidents that took place in each sample country in each year. Our sample includes
not only countries that did not experience any CBRN attacks, but also countries
that experienced one or more CBRN incidents during the sample period.
Because the value of the dependent value is always zero for the former countries,
while the value is positive for some years and zero otherwise for the latter countries, we assume that the zero and nonzero counts in this setting are generated
by different processes. That is, there are countries that are never at risk of CBRN
terrorist attacks (i.e., terrorists never nd them to be attractive targets), while
there are other countries that are at risk of CBRN terrorist events where terrorists may or may not strike in any given year. Terrorists locational choice for a
specic CBRN event is based on a two-step process. First, they decide which
countries are potential venues. Second, in a particular year, terrorists choose
which of these potential sites to stage a CBRN incident.
The negative binomial regression model, discussed in the previous section,
only accounts for one source of overdispersion, namely unobservable individual heterogeneity (i.e., certain unidentied socio-political characteristics of the
countries that may or may not attract terrorists). In addition to individual
heterogeneity, a zero-inated negative binomial (ZINB) model considers
another source of overdispersionthat is, excess zeros arising from the twostep data-generating process (Greene 1994). Countries can fall into two categories: with probability /, a country may never experience a CBRN incident,
and with probability 1/, a country may be at risk for CBRN incidents. Probability / is a function of the characteristics z of the country and is determined by a logit model. Both zero and positive counts in the second group
are generated by a negative binomial process in which the exponential mean
is modeled as
lit expb0 b1 Democracyit b2 Honestyit b3 Lawit b4 LnGDP =Populationit ;
4
where Democracyit, Honestyit, and Lawit refer to the polity, rule of law, and honesty
indices, respectively, and Ln(GDP Population)it denotes logged gross domestic
product (GDP) per capita. Hence,
yit = 0, with probability /it;
yit = negative binomial[lit], with probability 1/it; and
/
expz0it c
;
1 expz0it c
where c is a vector of coefcients to be estimated for the logit model.

We include a constant and past CBRN incidents (i.e., CBRNt1) in vector zit
CBRNt1 is used as an explanatory variable in the logit model to test for any possible state-dependence effects. Terrorists may repeatedly stage their attacks in the
same countries on account of networks and infrastructure formed from past
actions. If, moreover, terrorists have to meet setup costs to achieve their rst
attack in a particular venue, they will choose to strike in those countries where
CBRN attacks have been previously perpetrated by other terrorists, with whom
they can form linkages to reduce initial costs. Thus, under the zero-inated
model, countries that have never experienced CBRN incidents will be predicted
to have zero CBRN events in the current period.
287
We again assume that observations across countries are independent but that
any two observations within a country are correlated. Thus, we apply a robust
variance estimator clustered over countries. Although our sample includes both
countries that have and have not experienced CBRN incidents, our sample size
is restricted by the availability of data on the countries regime characteristics,
used to predict the number of CBRN events. Since we only have data on democracy until 2003, the time span of our study is from 1988 to 2003. Furthermore,
we do not have data on democracy, corruption, and rule of law for all of the
countries in each of the years, so that we end up with 126 countries. The number of available years for each country ranges from 2 to 16 (with an average of
14.6 years per country). The resulting number of observations is 1729. (We
lose 106 observations due to the inclusion of the lag of the number of CBRN
incidents in the logit model.)
In Table 4, we present the results of the estimation of equation (4) using the
four cohorts. For the three subsamples, we exclude certain perpetrators, but the
number of countries and years that could serve as the venue and time of potential attacks remains the same. Hence, the number of observations (i.e., 1729) in
each subsample is identical as that for the entire (All) sample. To account for
collinearity between the log of GDP per capita and rule of law (the correlation is
0.65), we present the results of estimating an alternative specication where the
log of GDP per capita is dropped from the model. Thus, there are eight alternative models, numbered (1)(8), in Table 4. In Table 5, we include the lag of the
dependent variable (i.e., CBRNt-1) as an additional determinant of the exponential mean to account for any path dependence effects, associated with the number of CBRN incidents in a country. This additional variable allows for a test of
Hypothesis 1 for the various cohorts of perpetrators.
To judge between the negative binomial and zero-inated negative binomial
models, Greene (1994) proposes the use of a test by Vuong (1989) for nonnested models. However, since we rely on a robust variance estimator clustered
over countries, the Vuong statistic cannot be applied. We, thus, base our decision to use the zero-inated model on substantive justication, which Long
(1997) views as the most compelling evidence. In our case, there are countries
where terrorists do not stage CBRN terrorist attacks for structural reasons. At the
same time, there are other countries where CBRN events are potentially anticipated, but do not occur by chance in given periods. Additionally, the negative
binomial model for positive counts appears preferable to the Poisson model,
because it is likely that there are unobserved sources of heterogeneity that differentiate the countries. This latter assumption is supported by the fact that we can
reject the hypothesis that the dispersion parameter a equals zero for all samples
and specications in Tables 4 and 5. Thus, we rely on the ZINB model to make
predictions about the expected number of CBRN events based on regime characteristics in different countries. The Wald test for all 16 models indicates that we
can reject the hypothesis that all coefcients are simultaneously zero at the .01
level of signicance. The results are broadly consistent for all comparative samples and specications in Tables 4 and 5.
For all samples, except Cults and Fundamentalists, the odds of CBRN events
occurring depend signicantly on the number of CBRN incidents in the preceding year. The negative coefcients on CBRNt1 in the logit model indicate
that past CBRN incidents decrease the odds that the number of CBRN incidents
will be zero in the next period. Moreover, the positive coefcients on past
CBRN incidents in the negative binomial model in Tables 4 and 5 imply that
the number of CBRN events is apt to be higher in those countries with more
past CBRN incidents. The effect of CBRNt1 is marginally signicant for the
entire sample and for nationalists separatists subsample. Thus, we conclude
that past CBRN events have a much stronger inuence on the odds of CBRN
288
TABLE 4.
Zero-Inated Negative Binomial Regressions on Regime Types (Standard Errors Adjusted for Clustering on Countries) 19882003
Independent
Variables
Nationalists Separatists
All
(1)
0.14*** (0.03)
)0.42*** (0.11)
0.36** (0.16)
)0.96* (0.58)
)2.69*** (0.67)
2.15*** (0.35)
1.46***
39.24***
)481.58
1729
(3)
0.12***
)0.56***
)0.004
)0.002
0.44
(4)
(0.04)
(0.11)
(0.14)
(0.15)
(0.89)
0.12*** (0.04)
)0.56*** (0.10)
)0.01 (0.13)
)16.40*** (2.24)
3.23*** (0.30)
0.79***
63.44***
)162.44
1729
)38.68*** (2.22)
3.23*** (0.30)
0.78***
59.89***
)162.44
1729
0.43 (0.57)
(5)
0.12**
)0.32
0.40
0.29
)4.59***
(6)
(0.05)
(0.46)
(0.27)
(0.22)
(1.19)
)1.63 (1.08)
2.99*** (0.74)
1.39***
27.60***
)130.27
1729
0.14*** (0.05)
)0.11 (0.44)
0.49* (0.26)
All Other Actors

(7)
(8)
(0.08)
(0.16)
(0.24)
(0.27)
(1.37)
0.14*** (0.05)
)0.64*** (0.21)
0.60** (0.29)
)3.21*** (0.84)
0.02
)0.65***
0.13
0.86***
)6.09***
)1.73 (1.05)
3.21*** (0.62)
1.07***
18.16***
)130.93
1729
)2.76*** (0.67)
2.46*** (0.53)
1.36***
31.96***
)294.54
1729
)2.79*** (0.62)
2.62*** (0.55)
1.58***
16.08***
)302.36
1729
)1.37 (1.22)
Notes: Dependent variable is the number of CBRN incidents per year (CBRNt). Standard errors are in parentheses. Each column provides the estimates from different parsings of the data
based on the perpetrators identityfor example, all perpetrators (All) and nationalists separatists.
Negative binomial model

Democracy
0.10** (0.04)
Honesty
)0.52*** (0.11)
Rule of law
0.18 (0.16)
ln (GDP per capita)
0.38** (0.16)
Constant
)2.81*** (0.97)
Logit model
)2.60*** (0.63)
CBRNt-1
Constant
2.07*** (0.35)
a
1.40***
Wald test (v2)
43.45***
Log-pseudolikelihood
)477.24
Observations
1729
(2)
Cults and Fundamentalists
289
terrorist incidents occurring than on the number of incidents in any particular

year.
The application of a robust variance estimator clustered over countries prevents us from conducting likelihood ratio tests to compare different specications of the model (such as Model 1 in Tables 4 and 5 or Model 1 and Model 2
in Table 5) owing to the presence of log pseudolikelihood values. As the odd
numbered models in Table 5 represent the most complete specications, we
focus our discussion on the coefcient estimates obtained from these models.
Democracy has a signicant positive inuence on the number of CBRN incidents across different samples and specications, thereby partly supporting
Hypothesis 4. The rule of law, however, does not have a signicant inuence on
the number of CBRN incidents in the odd numbered models. Based on Model 1
in Table 5, a one-point increase in the democracy index increases the expected
number of CBRN incidents for all perpetrators by 9%. The size of this is approximately the same for all samples with cults and fundamentalists displaying the largest percentage increase. Honesty has a signicant negative impact on the use of
CBRN terrorism by different types of perpetrators taken separately and together,
which supports Hypothesis 5. According to Model 1, a one-point increase in the
honesty indicator results in 46% fewer CBRN incidents for the entire sample.
The effect is particularly pronounced for religious cults and fundamentalists,
where a one-point increase leads to a 56% decline in CBRN incidents. This suggests that corruption plays an important role in motivating religious groups to
resort to CBRN substances. For the entire sample, the impact of corruption is
about four times greater than that of democracy. Wealth is a signicant positive
inuence of CBRN incidents for the entire sample and all other actorsthe two
biggest numbers of perpetratorsthus supporting Hypothesis 6 for these samples. Hypothesis 6 is not, however, supported for nationalists separatists or cults
and fundamentalists. For models 1 and 7, the inuence of income per capita is
fairly large.
For the negative binomial regression, the marginal effect of a regressor
depends on the expected value of the count variable, which depends on the
values of all independent variables. Marginal effects are computed with all variables held at their means. Based on the coefcient estimates of Tables 5 and 6
presents the marginal effect of democracy, honesty, rule of law, and log of GDP
per capita on the expected number of CBRN events. Of all of the explanatory
variables, CBRNt1 has the largest marginal impact on the expected number of
CBRN incidents for all but the cults and fundamentalists sample. This impact is
particularly important for nationalists separatists, where an increase in one incident in the previous year, with all variables held at their means, raises the expected number of CBRN events by 0.36. The marginal effects of democracy and
honesty, though signicant, are not very large. For example, in Model 1, if a
countrys democracy score improves by one unit, then the expected number of
CBRN events increases by just 0.007. If, similarly, a countrys ranking in terms of
the honesty index increases by one, then the expected number of CBRN incidents decreases by 0.036. These marginal effects are small since there have not
been many CBRN incidents to date.
Concluding Remarks
Currently, the Monterey WMD data indicates that CBRN terrorism has not been
very deadly even though the number of terrorism-based CBRN events has
increased since 1988. On average, a CBRN incident has been only half as deadly
as a conventional terrorist incident. Nevertheless, the authorities must be concerned about such events because some terrorists are clearly interested in using
CBRN substances. CBRN incidents could some day result in mass death and
290
TABLE 5. Alternative Zero-Inated Negative Binomial Regressions on Regime Types (Standard Errors Adjusted for Clustering on Countries) 19882003
Independent
Variables
All
(1)
0.19**
0.12***
)0.37***
0.29*
(3)
(0.09)
(0.03)
(0.09)
(0.15)
)1.15** (0.57)
)2.97*** (1.09)
1.85*** (0.50)
1.73***
68.99***
)475.48
1729
0.21*
0.11***
)0.47***
)0.04
0.01
0.04
(4)
(0.11)
(0.04)
(0.11)
(0.15)
(0.15)
(0.84)
)16.83*** (1.23)
3.04*** (0.35)
0.85***
80.18***
)161.50
1729
0.21*
0.11***
)0.47***
)0.04
(5)
(0.12)
(0.04)
(0.10)
(0.14)
0.07 (0.57)
)16.66*** (1.23)
3.04*** (0.35)
0.84***
80.35***
)161.50
1729
0.48
0.13**
)0.56*
0.29
0.28
)4.53***
(6)
0.48
0.15***
)0.44
0.41
All Other Actors

(7)
(0.34)
(0.05)
(0.37)
(0.29)
(8)
(0.30)
(0.06)
(0.29)
(0.32)
(0.26)
(1.48)
)3.18*** (0.85)
0.11
0.03
)0.58***
0.12
0.75***
)5.70***
(0.11)
(0.07)
(0.19)
(0.24)
(0.26)
(1.23)
)1.31 (1.03)
1.88 (1.28)
2.33***
36.95***
)125.28
1729
)1.42 (1.08)
2.01 (1.47)
2.21***
41.86***
)126.08
1729
)2.92*** (0.85)
2.27*** (0.75)
1.63***
82.37***
)293.22
1729
0.15
0.13**
)0.52**
0.50*
(0.14)
(0.05)
(0.23)
(0.26)
)1.65 (1.34)
)2.99*** (0.89)
2.37*** (0.81)
1.94***
56.36***
)299.90
1729
Negative binomial model

0.18* (0.09)
CBRNt-1
Democracy
0.09** (0.03)
Honesty
)0.46*** (0.09)
Rule of law
0.14 (0.15)
ln (GDP per capita)
0.32** (0.15)
Constant
)2.74*** (0.91)
Logit model
CBRNt-1
)2.84*** (0.95)
Constant
1.79*** (0.51)
a
1.66***
Wald test (v2)
78.12***
Log-pseudolikelihood
)472.04
Observations
1729
(2)
Independent
Variables
Marginal Effects Evaluated at the Sample Mean of Regressors (Based on Table 5)

All
(1)
(2)
(3)
(4)

(5)
(6)
All Other Actors

(7)
CBRNt-1
0.194** (0.075)
0.218** (0.088) 0.358*** (0.125) 0.352*** (0.123)
0.015 (0.010)
0.017* (0.009) 0.090** (0.035)
Democracy
0.007** (0.003) 0.010*** (0.003) 0.002** (0.001) 0.002** (0.001) 0.001** (0.001) 0.001*** (0.001)
0.001 (0.002)
Honesty
)0.036*** (0.010) )0.031*** (0.009) )0.011** (0.005) )0.011** (0.005) )0.005** (0.002)
)0.004 (0.003) )0.019** (0.009)
Rule of law
0.011 (0.012)
0.024* (0.012)
)0.001 (0.003)
)0.001 (0.003)
0.003 (0.003)
0.004 (0.003)
0.004 (0.008)
ln (GDP per capita)
0.025** (0.012)
0.0002 (0.003)
0.003 (0.003)
0.025** (0.011)
(8)
0.114**
0.005**
)0.021*
0.020**
(0.044)
(0.003)
(0.011)
(0.010)
TABLE 6.
291
292
signicant economic losses. Thus, recent action by the DHS in the United States
to prepare for such events appears to be prudent. The real question is how
much to spend and whom to protect against. Another question concerns the foreign policy implications of this preparation.
We have applied inferential statistics to provide a picture of the likely risks
from CBRN terrorism. The picture that emerges is that past CBRN incidents lead
to future incidents regardless of the class of perpetrator. An increase of one
CBRN incident in the previous year leads to a 0.194 to 0.358 increase of CBRN
events in a given country per year. Once terrorists surpass the threshold associated with CBRN terrorism, they generally continue such attacks. Thus, past incidents inform policymakers as to where the greatest risks lie. Past CBRN incidents
have the greatest marginal impact on future incidents, followed by corruption
and then democratic principles.
Religious cults and groups with a transnational orientation pose the largest
threat, based on an analysis of past data. Contrary to the views of some experts
(e.g., Hoffman 1995; Cameron 1998; Post 2005), religious fundamentalists and
nationalists separatists do not present as signicant of a CBRN concern. Democratic principles and protection are conducive to CBRN terrorism, while regime
honesty is not supportive of such terrorism. Other things constant, rich countries
are more likely venues for CBRN terrorism by loners and other actors, not
usually identied in the literature as the likely culprits.
So what policy lessons should be drawn from this study? In terms of perpetrators, governments must be especially vigilant against cults, since they appear to
be the most likely to deploy such attacks. In addition, transnational terrorist
groupsfor example, al-Qaidapresent a CBRN risk as they try to surpass the
carnage level of 9 11. The renewed strength of al-Qaida indicates CBRN concerns. Given the casualties associated with conventional terrorism relative to past
CBRN incidents, authorities need to recognize that conventional attacks still
represent the greater risks when allocating antiterrorism resources. Failed states
may provide a haven for terrorists to organize and train, but rich democratic
countries have been the location for past CBRN terrorist incidents and the likely
venue for future attacks. Thus, some resources must be allocated to curb such
attacks. This also means that rich liberal democracies must cooperate with one
another in monitoring and addressing the CBRN threat. From a foreign policy
viewpoint, this is not a problem that rich democracies can confront alone because
the terrorist will set up shop where there is the least vigilance. Because corruption
has been a prime determinant of CBRN incidents, rich democratic countries must
take extra precautions to screen and monitor personnel at laboratories, universities, hospitals, and nuclear power plants where CBRN materials can be obtained.
This is also true of infrastructure workers (e.g., truck drivers for nuclear waste).
Given the current CBRN threat, governments must display a measured vigilance
that does not squander funds on what remains a moderate threat.
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ECONOMIC CONSEQUENCES OF TERRORISM IN DEVELOPED AND

DEVELOPING COUNTRIES: AN OVERVIEW
By
Todd Sandler*
USA
tsandler@usc.edu
213-740-9695
323-256-7900 (fax)
Walter Enders
Department of Economics, Finance
and Legal Studies
USA
wenders@cba.ua.edu
205-348-8972
205-348-0590 (fax)
* Todd Sandler is the Robert R. and Katheryn A. Dockson Professor of International Relations
and Economics at the University of Southern California. Walter Enders is the Bidgood Chair of
Economics and Finance at the University of Alabama.
ECONOMIC CONSEQUENCES OF TERRORISM IN DEVELOPED AND

DEVELOPING COUNTRIES: AN OVERVIEW
subnational groups to obtain a political or social objective through the intimidation of a large
audience, beyond that of the immediate victim. Although the motives of terrorists may differ,
their actions follow a standard pattern with terrorist incidents assuming a variety of forms:
airplane hijackings, kidnappings, assassinations, threats, bombings, and suicide attacks. Terrorist
attacks are intended to apply sufficient pressures to a government so that it grants political
concessions. If a besieged government views the anticipated costs of future terrorist actions as
greater than the costs of conceding to terrorist demands, then a government will make some
accommodation. Thus, a rational terrorist organization can, in principle, reach its goal quicker if
it is able to augment the consequences of its campaign. These consequences can assume many
forms including casualties, destroyed buildings, a heightened anxiety level, and myriad economic
costs. Clearly, the attacks on September 11, 2001 (henceforth, 9/11) had significant costs that
have been estimated to be in the range of $80 to $90 billion when subsequent economic losses in
lost wages, workmans compensation, and reduced commerce are included (Kunreuther, MichelKerjan, and Porter, 2003).
Terrorism can impose costs on a targeted country through a number of avenues. Terrorist
incidents have economic consequences by diverting foreign direct investment (FDI), destroying
infrastructure, redirecting public investment funds to security, or limiting trade. If a developing
country loses enough FDI, which is an important source of savings, then it may also experience
reduced economic growth. Just as capital may take flight from a country plagued by a civil war
(see Collier et al., 2003), a sufficiently intense terrorist campaign may greatly reduce capital
inflows (Enders and Sandler, 1996). Terrorism, like civil conflicts, may cause spillover costs
2
among neighboring countries as a terrorist campaign in a neighbor dissuades capital inflows, or a
regional multiplier causes lost economic activity in the terrorism-ridden country to resonate
throughout the region.1 In some instances, terrorism may impact specific industries as 9/11 did
on airlines and tourism (Drakos, 2004; Ito and Lee, 2004). Another cost is the expensive
security measures that must be instituted following large attacks e.g., the massive homeland
security outlays since 9/11 (Enders and Sandler, 2006, Chapter 10). Terrorism also raises the
costs of doing business in terms of higher insurance premiums, expensive security precautions,
and larger salaries to at-risk employees.
The size and the diversity of an economy have much to do with the ability of a country to
withstand terrorist attacks without showing significant economic effects. Yemens shipping
industry suffered greatly after the terrorist attacks on the USS Cole and the Limburg diverted half
of Yemens port activities to competitive facilities in Djibouti and Oman due to a 300% increase
in insurance premiums (US Department of State Fact Sheet, 2002). In a more diversified and
developed economy, such losses may have a temporary influence as resources are reallocated to
other sectors or better security measures are deployed to allay concerns. Moreover, developed
economies have better monetary and fiscal capabilities to limit macroeconomic impacts of
terrorist attacks than small developing countries. Thus, we should anticipate that developed
countries are more likely to display sector-specific reactions to terrorism attacks, while
developing countries are apt to exhibit some macroeconomic consequences to a particularly
vicious attack or a sustained terror campaign.
This paper has five purposes. First and most important, the paper takes stock of the
literature on the economic consequences of terrorism and evaluates the methodology used to
date. The literature dates back to the early 1990s, with most of the contributions coming after
9/11. Second, macroeconomic influences of terrorism are distinguished from microeconomic
3
sector- or industry-specific effects. Third, terrorism impacts in developed countries are
contrasted with those in developing countries. Fourth, we indicate how researchers can better
account for economic consequences in developing countries. Finally, data needs are addressed.
The remainder of the paper contains eight sections. Section 1 reviews concepts and
definitions that are necessary for understanding the economic consequences of terrorism. In
Section 2, we investigate how the United States, representative of other developed nations,
cushioned the blow and sped recovery from the unprecedented attacks of 9/11 through monetary,
fiscal, and other policies. Section 3 reviews and evaluates some macroeconomic studies of the
impact of terrorism, whereas Section 4 contrasts anticipated differences between how developing
and developed countries are affected by terrorism. In Section 5, we review and analyze past
microeconomic studies of the economic fallout from terrorism. Section 6 discusses past
methodologies. In Section 7, we indicate data availability and needs. Section 8 provides future
directions and conclusions.
1. Essential Concepts
Studies over the last decade have established that internal conflicts can have significant
economic consequences in terms of reduced growth within a conflict-ridden country (e.g.,
Collier and Hoeffler, 2004; Collier et al., 2003; Collier and Sambanis, 2002) and in neighboring
countries (Murdoch and Sandler, 2002, 2004). But a civil war is a broader conflict than
terrorism, since the former usually involves a minimum of 1000 deaths and may result in tens of
thousands of casualties, while a terrorist incident results, on average, in a single death (Sandler,
2003). Thus, a country may be plagued with terrorism in, say, ten of ten years, but experience
relatively few deaths and modest property damage. Civil wars may stem from an insurrection
that tries to overthrow the government. In other cases, civil wars can erupt from grievances
4
between groups with deep-seated differences (hatreds). Terrorism is a tactic that may or may not
be associated with a civil war, insurrection, or other form of political violence. As such,
terrorism typically involves little loss of life and property. Naturally, there are exceptions, such
as the March 11, 2004 Madrid train bombings or the December 21, 1988 downing of Pan Am
flight 107, where two to three hundred people perished, respectively. But even in these cases,
the loss of life, though tragic, is trivial compared with most internal conflicts so that the likely
macroeconomic impact of terrorist events is not anticipated to rival civil wars.
This prediction may change under a few scenarios: a large-scale attack like 9/11, a
protracted terrorist campaign with many deadly incidents, or some devastating attack on a
developing countrys primary sector (recall the Yemen shipping example). One should not
expect that a modest number of terrorist incidents in most countries will affect the countries
income growth. This is an essential insight, because it indicates that indices of risks that include
internal conflicts and terrorism may be merely picking up significant disruptions associated with
the former. Additionally, sector-specific microeconomic influences are often the most likely
consequences from terrorism.
Cost distinction
There are numerous cost distinctions that could be drawn regarding terrorism losses.
Direct costs, for example, involve the immediate losses associated with a terrorist attack or
campaign and include damaged goods, the value of lives lost, the costs associated with injuries
(including lost wages), destroyed structures, damaged infrastructure, and reduced short-term
commerce. In contrast, indirect or secondary costs concern attack-related subsequent losses,
such as raised insurance premiums, increased security costs, greater compensation to those at
high-risk locations, and costs tied to attack-induced long-run changes in commerce. Indirect
5
costs may surface as reduced growth in gross domestic product (GDP), lost FDI, changes in
inflation, or increased unemployment. A judgment must be made as to how to distinguish
between direct and indirect costs, in which any distinction would strike some researchers as
arbitrary.
Fortunately, this distinction is not really necessary to characterize the economic impact of
terrorism, which can be represented in terms of some well-defined macroeconomic (e.g., real per
capita GDP growth) or microeconomic variable (e.g., reduced tourist receipts). These variables
then represent the consequences of terrorism in terms of aggregate or sectoral activity. If lost
output, casualties, and damaged infrastructure are sufficiently large, then they will affect the
economys productive capacity with macroeconomic or microeconomic repercussions. The
identification of these impacts is of greater importance than the mere tally of losses if policy is to
ameliorate the economic ramifications of terrorism. Thus, we concentrate on relating terrorism
to macroeconomic and microeconomic variables that policy can be designed to bolster.
Domestic versus transnational terrorism

Terrorism comes in two essential types: domestic and transnational. Domestic terrorism
is homegrown with consequences for just the host country, its institutions, citizens, property, and
policies. In a domestic terrorist incident, the victim and perpetrators are from the host country.
The Oklahoma City bombing on April 19, 1995 was a domestic terrorist event as was the
kidnapping of members of Parliament by Colombian terrorists. Many ethno-nationalist conflicts
(e.g., the Tamils of Sri Lanka) are associated with mostly domestic terrorism, unless the rebels
desire to target citizens from other countries to publicize their cause to the world. Domestic
events tend to outnumber transnational terrorist events by eight to one (Enders and Sandler,
2006).
6
In contrast, transnational terrorism involves more than one country. This international
aspect can stem from the victims, targets, institutions, supporters, terrorists, or implications. For
example, 9/11 is a transnational terrorist event because the victims were from many different
countries, the mission was financed and planned from abroad, the terrorists were foreigners, and
the implications of the events (e.g., financial and security) were global. A hijacking that
originates in one country but terminates in another country is an instance of transnational
terrorism as is the assassination for political ends of a foreigner on a city street. Transnational
terrorist attacks often entail transboundary externalities: actions or authorities in one country
impose uncompensated consequences on person or property in another country. Thus, spillover
costs can result so that the economic impact of a terrorist event may transcend the host country.
The toppling of the World Trade Center towers on 9/11 killed many British nationals and had
ramifications for British financial institutions. Chen and Siems (2004, Table 2, Figures 2-3)
showed that 9/11 negatively influenced average returns on stock markets globally. In fact, the
11-day cumulative average abnormal returns were larger on the London, Frankfurt, Paris,
Toronto, Amsterdam, Switzerland, Italy, and Hong Kong stock markets than on the New York
Stock Exchange following 9/11. The four blasts on 9/11 reverberated on capital markets
worldwide.
The distinction between domestic and transnational terrorism is of utmost importance
when determining the right data for calculating the economic consequences of terrorism.
Suppose that we want to relate the growth in real per capita GDP to the level of terrorism. Then,
for a country plagued by both domestic and transnational terrorism, it becomes imperative that
all forms of terrorism are included in the terrorism measure on the right-hand side of the
equation. This is also true for a country-specific study of terrorisms consequences on
macroeconomic variables. If, however, one is interested in the impact of terrorism on a host
7
countrys net foreign direct investment (NFDI), then transnational terrorist attacks are most
germane, since these attacks pose a more direct risk on foreign investors interests. If only
transnational terrorist attacks are included as a determinant of GDP growth, and if, additionally,
domestic attacks tend to be correlated with transnational terrorist incidents, then the coefficient
on terrorism will be biased. Furthermore, the coefficient on terrorism may reveal little about the
true quantitative relationship when domestic terrorism greatly exceeds the number and/or
intensity of transnational terrorism.
Causality
A final preliminary concerns the causal nature between terrorism and the macroeconomic
variable that proxies the consequences of terrorism. If economic downturns can create
grievances that result in terrorism, then economic conditions may be both a root cause of
terrorism and a consequence of terrorism. Recently, researchers have established with panel
estimates that economic conditions, particularly downturns, can generate transnational terrorist
attacks.2 Given this evidence, a researcher must be prudent to test and/or correct for a potential
endogeneity bias.
2. Macroeconomic Effects of Terrorism

An economy as rich and diverse as that of the United States is anticipated to withstand
most terrorist events with little macroeconomic consequences. During most years, the United
States experienced few terrorist events on its own soil e.g., in 1998, 2000, and the years
following 2001, there were no terrorist events in the United States (Sandler and Enders, 2004;
US Department of State, 1999-2004). Moreover, the breadth of US economic activities is
sufficiently diverse to absorb the impact of an attack by shifting activities to unaffected sectors.
8
The immediate costs of typical terrorist acts, such as kidnappings, assassinations, or bombings,
are localized, not unlike ordinary crimes. Currently, crimes such as identity thief have far greater
potential economic consequences than terrorism to developed countries. In most developed
countries, terrorism generally causes a substitution from sectors vulnerable to terrorism into
relatively safe areas and, thus, does not affect the entire macroeconomy.3 If airlines become
risky, factors of production will shift from the airline sector to other relatively safer sectors. Of
course, a terrorist act of the magnitude of 9/11 can shake confidence and influence sufficiently
many sectors to have macroeconomics repercussions. But as we show below, developed
countries are positioned to take actions to limit these impacts.
This representation is in marked contrast to small economies in which terrorism is
prevalent and affects daily activities as in Colombia, Israel, and the Basque region of Spain. For
these economies, terrorism can reduce GDP and curb development, especially during prolonged
campaigns (e.g., Israel since September 27, 2000). Protracted terrorism leads to the anticipation
of future events, which create risk premiums that limit activities in terrorism-prone sectors.
Investors, both at home and abroad, may decide to direct their assets to safer activities in other
countries. If terrorists succeed in scaring away investments, they may be emboldened to take
further actions to cause economic losses.
US experience in light of 9/11

Figure 1 provides strong evidence for the view that the US economy quickly rebounded
from 9/11. The vertical line in the center of each panel of Figure 1 represents the third quarter of
2001 (i.e., 2001:Q3) corresponding to 9/11. Panel 1 shows that real GDP was virtually
unchanged throughout 2000 and fell slightly in the first and third quarters of 2001. The key
feature is that real GDP began to grow sharply beginning in the fourth quarter of 2001 following
9
9/11. Panel 2 shows that the Conference Boards measure of consumer confidence plummeted
right before the onset of the 2001 recession; however, immediately following 9/11, confidence
actually soared. Some of this increase might be attributed to the patriotism of the American
public. As displayed in Panel 3, the rebound in economic activity was buoyed by strong
consumer demand for durables. These big-ticket items are the most volatile component of
total consumption, which jumped in the fourth quarter of 2001. Panel 4 indicates that the
unemployment rate was rising prior to 9/11, and rose dramatically after the attack. Because the
unemployment rate is a lagging indicator of economic activity, this rate would likely have
increased even without 9/11. Thus, we must wonder what would have happened to
unemployment in the absence of 9/11 i.e., the unemployment rate may have risen even faster.
There is an overwhelming consensus that well-orchestrated macroeconomic
policymaking cushioned the shock from 9/11 in the United States. The financial markets were in
disarray as bond market trading was suspended for a day and stock market trading did not
resume until the following week. During uncertain times, risk-averse asset holders increase the
proportion of highly liquid assets in their portfolios. As shown in Panel 5, the Federal Reserve
reacted to this surge in liquidity demand by sharply cutting the Federal Funds rate, thereby
keeping funds available for investment and other needs. Fiscal policy also performed a
supportive role. The first tax cut since 1985 was signed into law in May 2001, months before
9/11. As a direct of 9/11, the US Congress approved a $40 billion supplemental appropriation
for emergency spending for such items as search and rescue efforts at the four crash sites and
tightened security at US airports and other venues. In addition to the needed disaster relief, this
surge in government spending acted as a powerful stimulus to aggregate demand. Starting on
October 7, 2001, the war in Afghanistan also bolstered government spending. As shown in Panel
6, government saving (i.e., the negative of what many call the federal governments budget
10
deficit) plummeted from uncharacteristic surpluses to record deficits. Although the government
budget deficit can have some long-term undesirable influences, US fiscal and monetary policies
clearly played an essential role in restoring consumer and business confidence.
3. Review of Macroeconomic Literature on Terrorism Impacts

The literature on the macroeconomic consequences of terrorism only began in 2003 and
involves only a handful of studies. One set of studies examines the influence of various terrorist
variables on real per capita GDP growth, while a second set of studies consists of case studies of
a country experiencing a long-term terrorist campaign.
Blomberg, Hess, Orphanides (henceforth BHO) (2004) examined a pooled cross section
of 177 countries from 1968 to 2000. Their estimating equation is:
yi = 0 + 1COM i + 2 AFRICA + 3 ln y0 i + 4 I Yi + 5Ti + 6 I i + 7 Ei + i ,
(1)
where yi is country is average per capita GDP growth rate, s are coefficients, COM is a
dummy variable for non-oil commodity exporters, AFRICA is a dummy for African countries,
y0i is country is initial income, I Yi is country is investment rate over the full sample, Ti is a
transnational terrorism indicator (e.g., a dummy for terrorism occurring in a given year), Ii
denotes the presence of an internal conflict in i, Ei indicates is involvement in an external
conflict, and i is the error term. Their baseline regression indicated that non-oil commodity
exporters and African nations had lower average per capita GDP growth of 1.2% and 1.36%,
respectively. We are primarily interested in BHOs terrorism variables impact on economic
growth. BHO found that if a country experienced transnational terrorist incidents on its soil in
each year of the sample period, then per capita income growth fell by 1.587 percentage points
over the entire sample period. Given the definition of Ti, each year of terrorism led on average to
11
a fall in growth of only 0.048% (=1.587/33). BHOs initial terrorism measure treated a year with
50 deadly incidents the same as a year with a single nonfatal incident. Moreover, these authors
used just transnational terrorism incidents drawn from the International Terrorism: Attributes
of Terrorist Events (ITERATE) data set (Mickolus et al., 2004). Most sample countries would
have experienced a far greater amount of domestic terrorism, which was not directly controlled
in the study. BHO were careful to control for internal and external conflict: internal conflict had
a significant negative effect on growth for some empirical specifications, while external conflict
did not have a significant influence. The internal conflict measure may be picking up some of
the impact of domestic terrorism because the later is often correlated with such conflicts.
BHOs study controlled for some endogeneity bias. An especially interesting part of their
study is their panel estimates for nondemocractic countries, OECD countries, African countries,
the Middle Eastern countries, and Asian countries. The panel estimates altered some right-hand
side variables compared with the cross-sectional regressions e.g., COMi was dropped and trade
openness was added along with lagged per capita growth. Except for the African panel, BHOs
terrorism indicator was not significant, which is a cause of concern. As a geographical area,
Africa displayed the least amount of terrorism in an average year (see Blomberg, Hess, and
Orphanides, 2004, Table 1; Enders and Sandler, 2005, Figures 5-6), yet Africa was the only
panel where the estimated terrorism coefficient was significant. This rather paradoxical finding
was never addressed. The full panel estimates gave a much greater impact of terrorism on
growth i.e., terrorism in a single year reduced per capita GDP growth by over a half a percent
compared with the cross-sectional estimates. No explanation was offered for this huge
difference in the consequences of terrorism between the two estimating procedures. We find it
worrying that terrorisms average influence on growth for the entire sample is not reflected in
any of the panels where terrorism is the greatest concern. Moreover, their large cross-section
12
analysis did not discriminate between different time periods where terrorism changed in
character for example, from left-wing groups to fundamentalist groups.
In another set of panel estimates, BHO (2004) changed their terrorism indicator to
terrorist incidents per capita. This change gives a significant terrorism impact on per capita GDP
growth for the full sample, the nondemocratic panel, the OECD panel, and the African panel.
Even though more panels displayed a significant impact of terrorism, the reader was never
informed why this terrorist indicator is preferred to the earlier indicator. Moreover, the impact of
terrorism varies widely between the full sample and the smaller cohort panels, leading one to
worry that the full sample average picture may not be representative of how smaller cohorts or
individual countries respond to terrorism.
Toward the end of the paper, BHO (2004) performed some panel estimates regarding
terrorisms influence on investment share of GDP and government spending share of GDP.
These estimates are interesting because they tried to establish the pathway by which terrorism
effects economic growth. BHO found that terrorism increased the government spending share,
while it decreased the investment share. This reallocation can affect growth by diverting
government activities away from more productive activities to security. Moreover, reduced
investment will limit growth directly.
Gupta et al. (2004) focused on a sample of 66 low- and middle-income countries to
ascertain the impact of armed conflict and terrorism on macroeconomic variables. For their
econometric estimates, they used three structural equations, where the dependent variables are
growth of real per capita income, government revenue as a share of GDP, and defense spending
as a share of GDP. Unlike BHO, Gupta et al. (2004) were interested in the joint impact of
internal conflict and terrorism on these three macroeconomic variables. For the conflict
measure, they used the Internal Country Risk Guide (ICRG) rating on internal conflict. In this
13
study, the ICRG conflict measure did not have a significant negative direct impact on per capita
income growth. However, this index had a significant positive influence on the share of defense
spending, which, in turn, had a significant negative influence on economic growth. Thus,
conflict indirectly reduced economic growth by increasing the defense spending share of
government spending.
A real advantage of this study is that it has a cohort of developing countries unlike BHO,
who included countries at all stages of development, thereby making it difficult to draw
conclusions about developing countries. The main drawback of the Gupta et al. study is that it
really did not measure the effect of terrorism per se on macroeconomic variables, because no
direct measure of terrorism was used. The ICRG index can indicate high risk when civil conflict
is high but terrorism is low or absent. Moreover, the index may point to low risk in the face of
terrorism if the overall intensity of internal conflict is low.
A third cross-sectional study by Tavares (2004) examined the cost of terrorism in terms
of reduced per capita GDP growth. His sample period was 1987-2001 for a large unspecified
sample of countries. The estimating equation is:
Growth GDPpcit = 0 + 1GrowthGDPpci ,t 1 + 2GDPpcit + 3Terrorismit
+ 4 Natural Disasterit + 5 Currency Crisisit + Additional Controls + it ,
where GrowthGDPpc is per capita GDP growth. On the right-hand side of equation (2), there is
lagged per capita GDP growth, per capita GDP, a terrorism measure, a natural disaster index, a
currency index, additional controls, and an error term. The terrorism measure is either the total
number of attacks per capita or the total number of casualties per capita. Tavares (2004) drew
his terrorism variable from data provided by the International Policy Institute for
Counterterrorism (2003). This data consist of 1427 selected transnational terrorist events for
the 1987-2001 period.
(2)
14
Using instrumental variables to address the potential endogeneity between terrorism and
real per capita GDP growth, Tavares found that the terrorism variable had a small but significant
negative impact on GDP growth of 0.038% (Tavares, 2004, Table 4). Once additional
determinants of growth (e.g., an education variable, trade openness, primary goods exports, and
the inflation rate) were introduced into the estimating equation, terrorism was no longer a
significant or negative influence on economic growth. This raises a concern because many of
these additional variables are in standard analyses of growth, so that Tavares earlier findings
about the consequences of terrorism must be questioned. The absence of key growth variables in
his earlier equations suggests that they were misspecified.
Tavares (2004) went on to compare the costs of terrorism in democratic versus
nondemocratic countries. For our purposes, the key part of his regression equation is:
yit = 0.261yit 1 0.029Tit + 0.121(Tit Rit ) + other explanatory variables,
(3)
where yit is country is growth of per capita GDP in year t, yit 1 is country is growth of per
capita GDP in year t 1, Tit is the number of terrorist attacks in country i in year t, and Rit is a
measure of political rights in country i in year t. This last variable increases when the level of
political freedom rises.
Equation (2) is a dynamic specification for which current period growth is affected by
growth in the previous period. In contrast to Tavares original specification that ignored political
rights, all of the coefficients reported in equation (2) are statistically significant. The coefficient
on Tit indicates that a single terrorist incident in country i in year t reduces annual growth for that
year by 0.029%. Since the model is dynamic, this growth effect is persistent. These results are
consistent in size with those of BHO. An interesting finding involves the positive coefficient on
the interaction term Tit Rit, for which the effect of a typical terrorist attack decreases as the level
15
of political freedom increases. That is, democracies are better able to withstand terrorist attacks
than other types of governments with less flexible institutions. Yet another interpretation is that
democracies are better prepared to weathered attacks because they rely on markets to allocate
resources.
Case studies
To date, there are two careful macroeconomic case studies on specific terrorism-ridden
economies. Both studies are careful and utilize methodologies that could be applied to other
countries e.g., Colombia that have experienced a prolonged campaign of terrorism. For the
Basque region, Abadie and Gardeazabal (2003) tried to estimate the per capita GDP losses that
are attributable to a twenty-year terrorist campaign. Because the Basque region differs from
other regions in Spain, the authors had to construct a synthetic comparison region by taking a
weighted average combination of other Spanish regions. The weights were chosen to yield the
values to key growth variables e.g., real per capita GDP, investment share of GDP, population
density, and human capital measures that are nearly identical to those of the Basque region
prior to its terrorism. The authors demonstrated that the Basque and synthetic regions displayed
similar per capita GDP values prior to 1975 and the start of the terror campaign. Thereafter, a
GDP gap opened that averaged 10% over the next twenty years. During high-terrorism episodes,
the gap exceeded 10%, while, during low-terrorism episodes, the gap closed somewhat. This is a
clever methodology where the synthetic region serves as the counterfactual control.
Eckstein and Tsiddon (2004) applied a vector autoregression (VAR) methodology to
investigate the effects of terrorism on the macroeconomy of Israel. These authors used quarterly
data from 1980 through 2003 to analyze the effects of terrorism on real GDP, investment,
exports, and nondurable consumer goods. Each of these variables served as a dependent variable
16
in their four-equation VAR system. Their measure of terrorism was a weighted average of the
number of Israeli fatalities, injuries, and noncasuality incidents. Their terrorism data included
domestic and transnational attacks in Israel. They found that the initial impact of terrorism on
economic activity was as short as a single quarter. Moreover, terrorisms impact on exports and
investment was three times larger than on nondurable consumption and two times larger than on
GDP.
Eckstein and Tsiddon (2004) also employed their VAR estimates to calculate the
counterfactual time paths of the four macroeconomic variables under the assumption that all
terrorism ceased at the end of 2003:Q4. In this counterfactual exercise, real per capita GDP is
forecasted to grow 2.5% from the beginning of 2003:Q4 to 2005:Q3. If, however, terrorism held
steady, then the estimated VAR predicted a zero rate of per capita GDP growth. Finally, if
terrorism in Israel were to continue its upward trend, real per-capita GDP would fall by about
2%. The figures for investment were even more dramatic because investment would decline by
10% annually with this upward trend.
In another set of experiments, Eckstein and Tsiddon (2004) calculated the economic
consequences of the Intifada. They used their data to estimate the VAR through 2000:Q3 (the
beginning of the Intifada) and forecasted real GDP for quarters 2000:Q4 through 2003:Q4.
Forecasts were conducted assuming either no subsequent terrorism or terrorism at the levels that
actually prevailed for these three years. The differences in forecasts translated into a per capita
GDP loss of about 10% for terrorism continuing at its prevailing elevated level, which is quite
substantial.
The five key macroeconomic studies are summarized in Table 1 for ready reference. The
first column indicates the study and its basic methodology,4 while the second column provides a
short description of the study. In the right-hand column, some key findings are indicated.
17
4. Developed and Developing Countries Contrasts
The macroeconomic case studies have been for two small high-income countries. In
Tavares (2004) and BHO (2004), a wide range of countries have been included in the cross
section making it difficult to know anything specific about developing countries. This is
underscored by the failure in BHO (2004) of many of the regional panels for Asia and elsewhere
to yield significant findings for the terrorist variable. Within each regional sample, there was no
culling of the developed or richer countries. The cross-sectional study that investigated
developing countries per se is Gupta et al. (2004), which has some key failings. First, there is no
true terrorism measure, so that the ICRG index is more reflective of internal conflict than of
terrorism. Second, this study combined countries with vastly different types of internal conflict;
thus, the average picture that emerges may not reflect of what most developing countries
suffered from terrorism. Developing countries with similar terrorist campaigns should be
combined in the same panel. Third, the cross section included countries with diverse political
and economic institutions. Developed institutions should enable a country to better absorb
terrorist attacks. To date, there is no cross-sectional study of the consequences of terrorism on
developing countries.
There are a number of anticipated differences between how developed and developing
countries are able to handle terrorism. Developed countries possess more capable governmental
institutions that can apply monetary, fiscal, and other policies to recover from either a large-scale
attack or a prolonged campaign. The United States case, discussed above, is instructive. For
example, the insurance crisis caused by 9/11 was addressed by the US Congress approving
emergency insurance legislation to cover catastrophic terrorism losses in the short run
(Kunreuther, Michel-Kerjan, and Porter, 2003). Markets are better able in developed, than in
18
developing, countries to respond to terrorism-induced changes in risk. Developed countries are
also better equipped than developing countries to monitor their economies to determine the need
for monetary or fiscal stimuli following terrorist attacks. In addition, developed countries can
take decisive and effective security measures to restore confidence. Many less-developed
countries lack this capacity. Such security measures can speed recovery. Because developing
countries are more dependent on the rest of the world for demands for their products and
services, these countries are more vulnerable than richer countries to terrorism shocks in
neighbors and important trading partners. Compared with their richer counterparts, developing
countries are less diversified and more apt to experience a larger impact from a sector-specific
attack. The earlier Yemen shipping example illustrates this insight. Finally, the presence of
internal conflicts in many developing countries compromises their ability to address terrorist
attacks, which may resonate with other forms of internal strife.
These differences between developed and developing countries have implications for
panel studies. Such differences raise real issues with the information encapsulated in the average
picture given by large-scale panels that combine countries at all stages of development.
Moreover, these differences indicate that controls are needed for neighboring conflicts,
corruption, and internal conflicts. To date, only the last control is included in past panel studies.
Future studies of developing countries should take two forms: (i) case studies of specific
developing countries and (ii) panel studies of a homogeneous set of developing countries.
5. Microeconomic Consequences of Terrorism
There have been studies dating back to the early 1990s that have investigated the
microeconomic consequences of sector-specific attacks. In particular, studies have covered
tourism, trade, and financial sectors.
19
Tourism
Attacks against tourist venues (e.g., airports, hotels, or attractions) or tourist mode of
transportation (e.g., airplanes) make a tourist consider the risks involved with their vacation
plans. Even a single heinous act at a popular terrorist venue can cause tourists to alter plans by
either vacationing at home or else going to a terrorism-free country for a holiday. Time-series
analysis has been used in a number of tourism studies to gauge the impact of terrorism in the
target country or region. A transfer function analysis is particularly suited to estimate the shortand long-run effects of a terrorist attack on a countrys tourist industry. A very simple transfer
function for, say, the effect of terrorism on Spanish tourism is:
yt = a0 + b1 yt 1 + c0 xt + t ,
(4)
where yt is the number of tourists visiting Spain in period t, xt is the number of terrorist incidents
in Spain in period t, and t is the error term. This equation reflects that the number of tourists
visiting Spain in any period is affected by its own past, yt 1 , as well as the number of terrorist
events in Spain. Because periods with high versus low levels of tourism tend to cluster, we
expect b1 to be positive; a large yt tends to follow a large yt 1 . In (4), c0 measures the
contemporaneous effect of a terrorist incident on tourism; a negative c0 means that terrorism
negatively impacts tourism. Suppose that c0 = 3 and there are four terrorist incidents during a
particular period (i.e., xt = 4), then the contemporaneous influence of terrorism on tourism is then
12. If the unit of measurement is a thousand, then terrorism has lost the country 12,000 tourists
following the attacks. If, moreover, b1 is not zero, then there is persistence in the system and
effects on terrorism could be long-lasting.
Equation (4) can be used to estimate the indirect effects on terrorism. To perform the
20
desired counterfactual analysis, a researcher would estimate equation (4) to obtain the
magnitudes of a0, b1, and c0 for a particular country. Once these values are ascertained, what
each value of yt would have been in the absence of terrorism (i.e., xt = 0) can be calculated. The
difference between this counterfactual value and the actual value of yt is then due to the effect of
terrorism. This analysis can be generalized in a number of directions: (i) additional lagged
values of the dependent variable; (ii) lagged values of the terrorism variable; and (iii) more
complicated causality between yt and xt. The first generalization allows for a more complex
autoregressive (AR) process where persistence can be long-term, while the second generalization
permits alternative impact patterns where terrorism may affect the dependent variable with a lag.
The third generalization can permit terrorism to affect tourism and vice versa, so that an equation
is required for each of these variables. In this case, a VAR methodology applies and causality
tests can fix the direction of dependency. A fourth generalization can allow for lagged values to
the error terms, so that a moving average (MA) process applies.
Enders and Sandler (1991) applied a VAR methodology to Spain for the 1970-91 period,
during which Euzkadi ta Askatasuna (ETA) and other groups had terrorist campaigns. During
1985-87, ETA directed its bombs and threats against the Spanish tourist trade and even sent
letters of warning to travel agents in Europe. Using monthly data, we showed that the causation
was unidirectional: terrorism affected tourism but not the reversed. Each transnational terrorist
incident was estimated to dissuade over 140,000 tourist after all monthly impacts were included.
This can translate into a sizable amount of lost revenue when multiplied by the average spending
per tourist. Transnational terrorist attacks denote the appropriate terrorism measure, because we
were interested in the costs to the foreign tourist trade.
In a follow-up study, Enders, Sandler, and Parise (1992) used an autoregressive
integrated moving average (ARIMA) analysis with a transfer function to investigate the impact
21
of transnational terrorism on tourism in Austria, Spain, and Italy for 1974-88 three countries
with highly visible transnational terrorist attacks during this period. The dependent variable was
the share of tourist receipts from the region. These authors found that terrorism had a significant
negative lagged influence on these tourism shares that varied by country: two quarters for Italy,
three quarters for Greece, and seven quarters for Austria. Since it takes time for tourists to revise
plans, the lags are understandable. Losses varied by country: Austria lost 3.37 billion special
drawing rights (SDRs); Italy lost 861 billion SDRs; and Greece lost 472 million SDRs. The
authors also showed that some of the lost revenues left a sample of European countries for safer
venues in North America.
Drakos and Kutan (2003) applied the Enders-Sandler-Parise methodology to Greece,
Israel, and Turkey for 1991-2000. These authors used monthly transnational terrorism data,
drawn from ITERATE. In addition to the home-country impacts, Drakos and Kutan were
interested in cross-country or spillover effect both positive and negative that may arise if,
say, an attack in Israel shifts would-be Israeli tourists to safer venues in Italy, Greece, or
elsewhere. Their ARIMA model with a transfer function had an equation for each countrys
tourist shares, where, say, the share of tourism in Greece depends on: past tourist shares in
Greece; current and past terrorist attacks in Greece; current and past terrorist attacks in Israel;
and current and past terrorist attacks in Turkey. There was also an equation for tourist shares of
Italy, which was a relatively safe haven. Owing to transnational terrorist attacks, these authors
calculated that Greece lost 9% of its tourism market share; Turkey lost over 5% of its tourism
market share; and Israel lost less than 1% of its tourism market. Close to 89% of lost tourism
due to terrorism in Europe flowed to safer tourist venues in other countries.5 Drakos and Kutan
also uncovered significant spillover effects low-intensity terrorist attacks in Israel reduced
Greek tourism revenues.
22
Net foreign direct investment

Foreign investors must be aware of all kinds of risks, including those posed by terrorism.
This risk is especially germane when a terrorist campaign specifically targets net foreign direct
investment (NFDI). Terrorist risks raise the costs of doing business as expensive security
measures must be deployed and personnel must be duly compensated, both of which reduce the
returns to NFDI. As these risks rise, investors will redirect their investments to safer countries.
Enders and Sandler (1996) provided estimates of the effects of terrorism on NDFI in two
relatively small European countries Greece and Spain. Large countries e.g., France,
Germany, and the United Kingdom draw their foreign capital inflows from diversified sources
and are able to endure attacks without a measurable diversion of inflows. Large countries are
also better equipped to take defensive measures after an attack to restore confidence. Greece and
Spain were selected as case studies insofar as both experienced numerous transnational terrorist
attacks aimed at foreign commercial interests during the 1968-91 sample period.
For Spain, we applied an ARIMA model with a transfer function that associated NFDI to
its past values and to terrorist attacks; for Greece, we applied a VAR model that related NFDI to
its past values and to terrorist attacks. Once again, we modeled a counterfactual exercise,
analogous to those for tourism, to compute the terrorism-induced losses in NFDI in these two
economies. For Spain, there was a long delay of 11 quarters between the advent of a terrorist
incident and the response in NFDI. A typical transnational terrorist incident in Spain was
estimated to reduce NFDI by $23.8 million. On average, transnational terrorism reduced annual
NFDI in Spain by 13.5%. For Greece, the story was similar, transnational terrorism curbed
annual NFDI by 11.9%. These are sizable losses for two small economies that were heavily
dependent on NFDI as a source of savings during the sample period. We also investigated the
23
influence of terrorism on NFDI in a number of large economies, such as France and the United
Kindom, and found no significant terrorism influence on these countries NFDI.
Trade influence
In a recent contribution, Nitsch and Schumacher (2004) estimated the effects of
transnational terrorism on bilateral trade flows using a standard trade-gravity model. In their
model, trade flows between trading partners depend on terrorist attacks, the distance between the
two countries, an income variable, an income per capita variable, and a host of dummy variables.
They formally estimated the effects of terrorism within each country on all of the nations
trading partners. The data set consists of 217 countries and territories over the 1968-79 period.
Their terrorism data were drawn from ITERATE and only included transnational attacks, even
though domestic terrorism would have also affected trade flows. The authors found that the first
transnational terrorist attack reduced bilateral trade by almost 10%, which is a very sizable
influence that may be picking up the effect of domestic terrorism. At times, transnational
terrorism is highly correlated with domestic terrorism. Nitsch and Schumacher also found that a
doubling of the number of terrorist incidents reduced bilateral trade by 4%; hence, high-terrorism
nations had a substantially reduced trade volume. Although more recent terrorism data are
available, the authors only examined this historical period, which is not reflective of current-day
terrorism.
Financial markets
Chen and Siems (2004) applied an event-study methodology to investigate changes in
average returns of stock exchange indices to 14 terrorist and military attacks that dated back to
1915. An event study computes abnormal returns negative or positive following some shock
24
or occurrence, such as the downing of Pan Am flight 107 or 9/11. These authors showed that the
influence of terrorist events on major stock exchanges, if any, is very transitory, lasting just one
to three days for most major incidents. The sole exception is 9/11 where DOW values took 40
days to return to normal. These authors also showed that this return period varied according to
the stock exchange exchanges in Norway, Jakarta, Kuala Lampur, and Johannesburg took
longer to rebound, while those in London, Helsinki, Tokyo, and elsewhere took less time to
rebound. Most terrorist events had little or no impact on major stock exchanges.
Eldor and Melnick (2004) applied time-series methods to ascertain the influence of the
Israeli terror campaign following September 27, 2000 on the Tel Aviv 100 Stock Index (TA
100). Given the continual nature of these terrorist attacks, the time-series method is clearly
appropriate. Analogous to the other time-series studies, they performed a counterfactual exercise
to determine losses to the value of the TA 100 index by using the estimated time-series equation
for returns but substituting a zero value in for terrorist attacks. Their analysis estimated that the
TA 100 was 30% lower on June 30, 2003, owing to the terrorist campaign. When these authors
investigated specific types of terrorist attacks, they found that only suicide attacks had a
significant impact. Their article also related the Israeli terrorist campaign to exchange rate
fluctuations.
By way of summary, Table 2 indicates the microeconomic studies, their methods, study
description, and major findings.
6. Methodology Discussion
To date, two basic methodologies have been applied to estimate macroeconomic and
microeconomic consequences of terrorism: panel estimates with large cross sections of countries
and time-series estimates with one or more equations. Each methodology has its advantages and
25
disadvantages as displayed in Table 3.
Our own view favors the time-series methods, which have been effectively used to come
up with estimates of tourism losses, NFDI losses, and stock market declines. The Eckstein and
Tsiddon (2004) study of Israel also illustrates that the same method can be employed to estimate
the consequences of terrorism on macroeconomic variables such as consumption per capita and
GDP per capita. Not only can time-series analyses lend themselves to counterfactual exercises,
but also they can be used for forecasting purposes. Although most time-series estimates do not
have antecedent behavioral models, the Eckstein and Tsiddon (2004) article shows that this need
not be the same, since their estimating equations stemmed from a dynamic theoretical model. By
incorporating a VAR analysis with multiple equations (i.e., one for each country), a researcher
can examine cross-border spillovers. This is demonstrated by Drakos and Kutans (2003)
analysis of tourism in the Mediterranean region.
Our concerns about cross-sectional studies involve the reliance on large samples, where
countries with wide-ranging incomes, security capacities, institutions, and terrorist experiences
are thrown into the same sample. This extreme heterogeneity for key variables means that the
average picture provided by the coefficient estimates may not be descriptive of the experience
of many of the sample countries. We believe that more insight is gained by doing the panel
estimates for a homogenous cohort of countries. Regarding the BHO (2004) study, we are
concerned that the geographical cohorts usually did not yield significant terrorism impacts for
the authors first terrorism measure, except for the region with the least terrorism; however, the
entire panel did yield significant consequences of terrorism. The logic of this finding is difficult
to accept. For this particular study, cohorts should have corresponded to countries with similar
income, institutions, and terrorism experience.
We are also concerned that so many different terrorism measures have been used. At
26
times, more than one measure is employed in the same study. Table 4 lists alternative measures
and the associated study. The most natural measure of terrorism is something that reflects the
frequency of attacks e.g., the number of terrorist attacks, the number of casualties, or some
index of these measures (e.g., the index used by Eckstein and Tsiddon, 2004). The number of
casualties is a better measure than the number of events if attack intensity is to be captured. The
temporal nature (i.e., daily, monthly, quarterly, or annual) of the attack measure depends on data
availability and econometric considerations. That is, researchers often relied on quarterly totals
to eliminate zero or near-zero observations that would violate the underlying normal distribution,
associated with many time-series methods. Because time-series techniques require many data
points, monthly or daily values may be used to expand the number of observations. If zero
values becomes a problem, estimates can then be based on a discrete Poisson distribution.
The use of a dummy to measure the occurrence of terrorism in a given year loses a lot of
useful information. In addition, a per capita measure of terrorism implies that an incident in a
country with a large population has a smaller influence than in a country with a smaller
population. In fact, the impact of a large-scale event such as 9/11 is, we believe, independent of
the population size. In fact, the impact of terrorist events in general may actually be greater for
countries with larger populations, because there are then more people to intimidate. The logic of
normalizing terrorist incidents by population has never been adequately explained in the
literature. This process is especially worrying for the BHO (2004) study because terrorism was
not significant for most panel cohorts until terrorism was normalized by population. Why this
was the case was never explained. As mentioned earlier, the ICRG measure of internal conflict
does not really capture terrorism per se, and thus, serves as a poor measure.
7. On Terrorism Data
27
To date, much of the literature has relied on the ITERATE data set of terrorist events.
Based on newspaper and media accounts, ITERATE records many variables e.g., incident date,
incident location by country, type of events, number killed, groups claiming responsibility, and
demands made for transnational terrorist events from 1968:Q1 through 2004:Q4. ITERATE
does not classify incidents as transnational terrorism that relate to declared wars or major
military interventions by governments, or guerrilla attacks on military targets conducted as
internationally recognized acts of belligerency. However, ITERATE classifies attacks against
civilians or the dependents of military personnel as terrorist acts when such attacks are intended
to create an atmosphere of fear to foster political objectives. A number of judgments must be
made in terms of what ITERATE includes as a transnational terrorist event. For example, Irish
Republican Army (IRA) attacks in Northern Ireland are not included as transnational terrorist
acts. IRA attacks in England are, however, included.
ITERATE variables are grouped into four files: the COMMON file on incident
characteristics, terrorist characteristics, victim characteristics, and life and property losses; the
FATE file on the fate of the terrorists and extradition; the HOSTAGE file on target of terrorist
demands, negotiation behavior, results of negotiations, and other nations involved in incidents;
and the SKYJACK file on incident characteristics, airline information, location of the incident,
and the number of individuals involved. ITERATE allows a researcher to match terrorist
incidents with countries so as to compute losses from transnational terrorist campaigns. These
losses would have to be inferred from macroeconomic and microeconomic data drawn from
other sources, because ITERATEs loss variable consists of mostly missing values. ITERATE
does not record domestic events, which are essential when computing the macroeconomic
consequences of terrorism if targeted countries are plagued by both transnational and domestic
terrorist events.
28
Tavares (2004) drew his terrorism incidents from data provided by the International
Policy Institute for Counterterrorism (IPIC) (2003), whose data set is located online. IPIC
describes its 1427 terrorist incidents for 1987-2001 as selected transnational terrorist incidents.
The data source does not, however, give its criteria for classifying an incident as a transnational
terrorist event. Moreover, IPIC does not provide its selection criterion; ITERATE records many
times the number of incidents during the same period. The IPIC selection criterion is particularly
important for judging potential biases. When sampling the incidents, we found many that would
not have satisfied ITERATEs transnational criterion e.g., some Palestinian incidents in Israel.
Until this year, the US Department of State (various years) maintained a transnational
terrorism data set that was released annually as Patterns of Global Terrorism. Except for a few
aggregate totals (e.g., total events, events by region, casualties by region, type of target, and type
of event), this data set is not in a form that can be used by researchers because the data files are
not available. The annual reports also contain short descriptions of significant attacks that
could be coded for a few variables. Nevertheless, many other events are not reported as
significant events, but could have important economic consequences. Bombs left near foreign
corporate offices may be insignificant if they caused damage but no injuries, but they could still
reduce NFDI.
The National Memorial Institute for the Prevention of Terrorism (MIPT) (2005) also
maintains an online data set on terrorism. From 1968 through 1997, the data consists of
transnational terrorism. Thereafter, MIPT tallies both domestic and transnational terrorist events.
The website makes it easy to make graphs and other displays. A researcher would have to
expend much effort to put the data in a form that would relate incidents by countries so that
statistical analysis on the economic consequences can be accomplished. The addition of
domestic events is very useful but there are only seven years of domestic events. A researcher
29
must be careful not to use the 1968-2004 data without purging the domestic incidents; otherwise,
there will be a huge inconsistency in data coverage in the post-1997 period.
There are a few data sets available for conducting specific country studies, which is
illustrated by the Abadie and Gardeazal (2003) study of Spain and the Eckstein and Tsiddon
(2004) study of Israel. In the latter case, the Israeli terrorism data came from the International
Policy Institute for Counterterrorism (2003) at the Interdisciplinary Center Herziliya
(http://www.ict.org.il). On a monthly basis, this data set includes the number of incidents,
causality figures, types of events, and other variables of interest. Domestic and transnational
events are included, a necessary inclusion for any country-specific study. We are, however, not
clear how this Israeli data set differs from the IPIC data used by Tavares (2004) for allegedly just
transnational terrorist attacks. Country-specific data sets are available for Colombia, Spain, and
few other countries (e.g., United Kingdom) that have faced significant terrorist campaigns.
The availability of country-specific data sets poses a real problem for panel studies,
because it will be a massive task to assemble sufficient domestic and transnational terrorist
incidents for a cohort of countries. The best alternative is to group together some terrorismridden countries, where such data exist, for a small panel estimate. It would be interesting to
compare these countries terrorism-induced declines in real GDP per capita to the experience in a
cohort of rich countries whose terrorism is mostly transnational in character. When combining
country-specific data from different sources, coding consistency is an ever-present worry.
8. Concluding Remarks
Table 5 lists some of the main principles that we have gleaned regarding the economic
consequences of terrorism. A few of these principles are worth highlighting. Given the low
intensity of most terrorist campaigns, the economic consequences of terrorism are generally very
30
modest and short-lived. Terrorism is not on par with civil or guerilla wars and, in general,
should have very localized economic effects. The likely candidate countries for noticeable
macroeconomic impacts are either developing or small countries that experience a protracted
terrorist campaign. In general, the economic influence of terrorism is anticipated to surface in
specific sectors that face an enhanced terrorism risk, such as the tourist industry or foreign direct
investment.
Except for a couple of case studies, we do not view any of the current macroeconomic
studies as providing convincing quantification of the economic impact of terrorism. Future
studies need to include domestic and transnational terrorist incidents for a homogeneous panel,
for which sample countries are at analogous stages of development and confront similar kinds of
terrorist campaigns. Domestic terrorist data must satisfy consistent criteria when pulled from
different sources. We also support the need for additional case studies, especially of developing
countries. We see the need to extend VAR analysis to a few countries confronting terrorist
campaigns in the same region to capture cross-border influences. Spatial econometric estimation
can identify the dispersion of the economic consequences.
We view the microeconomic estimates of terrorism consequences as being quite
successful and informative. The methodology can be extended to other countries, especially
developed countries, as case studies and small panels. More effort should be expended to
identify sector-specific, cross-border spillovers e.g., in the case of foreign direct investment. In
addition, the methods can be applied to vulnerable sectors previously unexamined.
31
Footnotes
1.
For civil conflicts, these spatial spillovers are measured by Murdoch and Sandler
(2002, 2004).
2.
Studies include Blomberg, Hess, and Orphanides (2004), Blomberg, Hess, and
Weerapana (2004), Li (2005), and Li and Schaub (2004). These studies investigated causes
beyond economic conditions e.g., globalization, democracy, and government restraint.
3.
On terrorism-induced substitution, see Enders and Sandler (1993, 2004, 2005).
4.
Some studies utilized additional methodologies. For example, BHO (2004) also
presented a VAR analysis. Abadie and Gardeazabal (2003) did an event study of abnormal
returns of two portfolios of stocks: one for firms with business interests in the Basque region
and one for firms with business interests elsewhere. The performance of the former portfolio
was tied to terrorist events in the Basque region.
5.
Sloboda (2003) also used a transfer function to analyze the effects of terrorism on
tourism revenues for the United States following the Gulf War of 1991.
32
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35
Series Methods, Tourism Economics, 9(2), 179-90.
Tavares, Jose (2004), The Open Society Assesses its Enemies: Shocks, Disasters and Terrorist
Attacks, Journal of Monetary Economics, 51(5), 1039-70.
United States Department of State (various years), Patterns of Global Terrorism (Washington,
DC: US Department of State).
United States Department of State Fact Sheet (2002), Yemen: The Economic Cost of
Terrorism, [http://www.state.gov/s/ct/rls/fs/2002/15028.htm], accessed 12 December
2004.
Figure 1. Macroeconomic variables and 9/11

Panel 1: Real GDP
Panel 2: Consumer confidence
Panel 3: Consumption of durables
110
115
110
100
110
105
(2001:Q3 = 100)
120
(1985 = 100)
120
115
(2001:Q3 = 100)
120
90
100
80
95
70
90
2000
2001
2002
2003
2004
90
1999
Panel 4: Unemployment rate
2000
2001
2002
2003
2004
1999
Panel 5: Federal funds rate
2002
2003
2004
5.5
2001
5.0
4.5
4.0
250
Billions of $
6.0
2000
Panel 6: Federal government savings
percent per year
6.5
percent of labor force
100
95
60
1999
105
-250
3.5
1
1999
2000
2001
2002
2003
2004
-500
1999
2000
2001
2002
2003
2004
1999
2000
2001
2002
2003
2004
Table 1. Macroeconomic studies of the impact of terrorism

Study and method
Description
Blomberg, Hess, and Orphanides (2003)
Growth in per capita income as a function of
Cross section and panel
conflict, terrorism, and standard growth variables.
Some runs control for endogeneity concerns. Entire
sample and select cohorts are analyzed.
Findings
Terrorism has a small effect on per capita
income growth for entire sample, but not for
most cohorts. Terrorism reduces I/Y, while it
increases G/Y.
Gupta, Clements, Bhattacharya, and

Chakravarti (2004)
Three-equation cross-section structural
model.
Eq. (1) is for the determinants of real per capita GDP

growth; eq. (2) is for the determinants of
governmental revenue as a share of GDP; and eq. (3)
is for the determinants of defense spending as a
share of GDP. A conflict-terrorism index is a
dependent variable in each equation.
The conflict index has no direct effect on

economic growth; it has an indirect effect by
increasing the defense spending share, which
lowers economic growth.
Tavares (2004)
Cross section
Growth in real per capita GDP is a function of

logged growth in real per capita GDP, terrorism,
other crises, and growth variables. Some runs
account for simultaneity bias. Introduces an
interactive term between terrorism and political
rights as a determinant of growth in per capita GDP.
Terrorism has a small effect on growth when

standard growth variables are left out. When
these variables are included, terrorism has no
influence. Evidence that countries with welldeveloped democratic institution can
withstand terrorism attacks
Abadie and Gardeazabal (2003)

Case study for Spain
Contrast the Basque region with terrorism and a

synthetic region without terrorism. The latter is
based on a weighted composite of other peaceful
regions in Spain.
Finds a 10% average gap in per capita GDP

that they attribute to terrorism over a twentyyear period
Eckstein and Tsiddon (2004)

VAR for Israel
The four interactive time series include per capita

GDP, investment, exports, and nondurable
consumption.
Terrorism has a significant negative impact on

per capita GDP, investment, and exports.
Terrorisms influence on investment and
exports is three times its effect on per capita
GDP. Counterfactual exercise shows that the
high recent levels of terrorism resulted in a 2%
annual decline in per capita GDP.
VAR denotes vector autoregression
Table 2. Microeconomic studies of the impact of terrorism

Study and method
Description
Enders and Sandler (1991)
Using monthly data for 1970-99, the study
VAR
relates terrorism and tourism for Spain. A
causality test establishes that terrorism affects
tourism, but not the reverse.
Findings
A typical terrorist incident is estimated to
scare away just over 140,000 tourists when all
monthly impacted are combined.
Enders, Sandler, and Parise (1992)

ARIMA with a transfer function
Relates share of tourist receipts to lagged

shares of tourist receipts and lagged terrorist
attacks. Focuses on Austria, Spain, and Italy
for 1974-88. Other continental countries
included to investigate out-of-region losses.
During sample period, tourist losses varied:

Austria lost 3.37 billion SDRs; Italy lost 861
million SDRs; and Greece lost 472 million
SDRs. The sample of Europe countries lost
12.6 billion SDRs of tourist receipts to North
America.
Drakos and Kutan (2003)

ARIMA with a transfer function
Using monthly data for 1991-2000, the study

relates a countrys share of tourist receipts to
terrorism. Focuses on Greece, Israel, and
Turkey. Allows for terrorist-induced
substitutions within and among regions.
Greece lost about 9% of its tourism market

shares due to terrorism; Israel lost less than
1% of its tourism market share due to
terrorism; and Turkey lost just over 5% of its
tourism market share due to terrorism. About
89% of lost European tourism flowed to safer
regions.
Enders and Sandler (1996)

ARIMA with transfer function for Spain
VAR for Greece.
Employs time-series methods to ascertain

losses in net foreign direct investment (NFDI)
due to terrorism. The sample period is 196891.
On average, terrorism reduced annual NFDI

in Spain by 13.5%, while it lowered annual
NFDI in Greece by 11.9%. There was a long
lag between an incident and its impact on
NFDI. Large rich countries weathered
terrorism without displaying a loss in NFDI.
Nitsch and Schumacher (2004)

Trade-gravity model
Terror attacks are added to a gravity model to

ascertain their impact on bilateral trades for
over 200 countries for 1960-93. Independent
variables include a language dummy, a
colonizer dummy, common border, and other
controls.
Terrorist incidents in a trading partner reduce

bilateral trade by almost 10%, compared with
terrorism-free trading partners.
Table 2. continued
Chen and Siems (2004)
Events-study methodology
Eldor and Melnick (2004)

Time-series methods
This study applies the events-study

methodology to uncover how many days are
required for stock markets to recover their
value after a large-scale terrorist attack.
Relies on time-series methods to display the

influence of terrorist attacks on the Israeli
stock market. Daily observations are utilized.
For the Dow, market value is recovered in 1

to a few days following large-scale terrorist
attacks. For 9/11, the Dow recovered in 40
days. Major conflicts are associated with
long recovery periods.
The terrorist campaign beginning on

September 27, 2000 lowered stock values on
the Tel Aviv exchange by 30%. Only suicide
attacks had a significant influence. The size
of the attack in terms of casualties was a
significant determinant of financial market
losses.
VAR denotes vector autoregression and ARIMA is autoregressive integrated moving average.
Table 3. Measurement of economic consequences of terrorism: panel versus time series

Panel estimation
! Advantages
A wide variety of countries can be considered.
Variation in key variables (e.g., per capita GDP) is larger.
Degrees of freedom are large.
The influence of terrorism on cohorts can be compared and contrasted.
! Disadvantages
The estimations average picture may not be descriptive of many (any) sample
countries, especially when the panel includes vastly diverse countries.
Data problems may arise from using different sources.
The dynamic effect of terrorism on key variables are not displayed.
Cross-border spillovers are difficult to identify.
Time-series estimation
! Advantages
There is no need to construct a behavioral model with explicit exogenous and
endogenous variables.
Dynamic processes can be readily identified; i.e., can evaluate shocks and the pattern
of adjustment over time.
Forecasts can be provided.
Microeconomic impacts can be readily identified.
Cross-border spillovers can be estimated.
! Disadvantages
The estimated model may be atheoretical with no antecedent behavioral model.
The number of countries examined is severely limited.
A large number of observations are required.
A generalized picture across nations is not given.
Table 4. Alternative measures for terrorism

Number of terrorist attacks
Drakos and Kutan (2003): monthly totals
Eldor and Melnick (2004): daily totals
Enders and Sandler (1991): monthly totals
Enders and Sandler (1996): quarterly totals
Enders, Sandler, and Parise (1992): quarterly totals
Nitsch and Schumacher (2004): annual totals and totals for entire 1968-79 period
Tavares (2004): annual totals
Occurrence of terrorism in a given year (dummy variable)
Nitsch and Schumacher (2004)
Terrorism incidents per capita
Tavares (2004): annual total attacks per capita
also broken down according to target, organization, and casualties.
International Country Risk Guide ratings on international conflict
Gupta, Clements, Bhattacharya, and Chakravarti (2004)
Specific terrorist events
Chen and Siems (2004)
Terrorism index
Eckstein and Tsiddon (2004): equally weights the number of attacks, the number of
deaths, and the number of injured.
Number of deaths from terrorism
Table 5. Economic impact of terrorism: summarizing principles
For most economies, the economic consequences of terrorism are generally very modest and
of a short-term nature.
Large diversified economies are able to withstand terrorism and not display adverse
macroeconomic influences. Recovery is rapid even from a large-scale terrorist attack.
Developed countries can use monetary and fiscal policies to offset adverse economic impacts
of large-scale attacks. Well-developed institutions also cushion the consequences.
The immediate costs of most terrorist attacks are localized, thereby causing a substitution of
economic activity away from a vulnerable sector to relatively safe areas. Prices can then
reallocate capital and labor quickly.
Terrorism can cause a reallocation from investment to government spending.
The effects of terrorism on key economic variables e.g., net foreign direct investment are
anticipated to be greatest in small economies confronted with a sustained terrorist campaign.
Some terrorist-prone sectors e.g., tourism have displayed substantial losses following
terrorist attacks.
Small countries, plagued with significant terrorist campaigns, display macroeconomic

consequences in terms of losses in GDP per capita.
January 2008
VITA for
Todd Sandler
PERSONAL DATA
Name:
Rank:
Address:
Todd Sandler
Vibhooti Shukla Professor of
Economics and Political
Economy
School of Economic, Political and
Policy Sciences
800 W Campbell Road
Richardson, TX 75080-3021
Marital Status: Married, 1 son (Tristan)
Wifes Name: Jean Marie Murdock

Home Fax:
Office Phone
Fax:
e-mail:
972-470-0103
972-883-6725
972-883-6486
tsandler@utdallas.edu
EDUCATIONAL BACKGROUND:
B.A., (cum laude) State University of New York at Binghamton, 1968.
M.A., State University of New York at Binghamton, 1970 (one semester at
Texas A & M, 1968).
Ph.D. in Economics, State University of New York at Binghamton, 1971.
DISSERTATION TITLE:
A Contribution to the Theory of Devaluation
MAJOR AREAS:
Public Economics and Public Choice
Applied Microeconomic Theory
International Political Economy
International Relations
Study of Terrorism
Natural Resources and Environmental Economics
Defense and Peace Economics
International Trade and Finance
COURSES TAUGHT:
Intermediate Micro; Intermediate Macro; Mathematical Economics; Graduate Seminar in
Micro; Graduate Micro I; Graduate Micro II; Graduate Macro I; Principles of Economics
(Micro, Macro); Graduate Seminar in Public Finance; Public Choice; Environmental
Economics; Graduate Managerial Economics; Graduate Welfare Theory; Graduate Theory of
Public Goods and Externalities; Honors Microeconomic Principles, Honors Seminar on
Terrorism; Undergraduate Public Finance; Seminar in Economics and Security; International
Policy Analysis; Global Economy; International Terrorism and Liberal Democracy, Graduate
Public Finance; Honors Game Theory; and Political Economy of Terrorism.
ACADEMIC POSITIONS:
Vibhooti Shukla Professor of Economics and Political Economy, University of Texas at

Dallas, August 2006 on.
Joint appointment as Professor of International Relations, Economics, and Law, Law

School, University of Southern California, March 2005 on.
Robert R. and Katheryn A. Dockson Professor in International Relations and Economics,

University of Southern California, August 2000 on.
Distinguished Professor of Economics and Political Science, Iowa State University, April
1995 to August 2000.
Leaves of Absence:
Visiting Fellow, University of Keele, UK, Fall semester 1996.
Visiting Distinguished Scholar, University of Newcastle, Australia, May 1996 to
June 30, 1996.
Professor of Economics, Iowa State University, May 1986 to April 1995.

(also given title of Professor of Political Science in September 1988)
Leave of Absence:
Honorary Fellow, University of Wisconsin-Madison, January 1990 to June 1, 1990.
Professor of Economics, University of South Carolina, August 1985 to May 1986.
Professor of Economics, University of Wyoming, July 1979 to December 1985.

Leaves of Absence:
Visiting Fellow, University of York, U.K., August 1983 to October 1983 and May
1984 to July 1, 1984.
Visiting Fellow, Australian National University, September 1981 to December
1981 and May 1982 to September 1982.
Visiting Scholar, Institute of Social and Economic Research, University of York,
U.K., Summer 1980.
Visiting Fellow, University of Aberdeen, Scotland, June to July 1979.
Associate Professor of Economics, University of Wyoming, June 1976 to June 1979.

Leave of Absence:
NATO Fellow, Institute of Social and Economic Research, University of York,
United Kingdom, June 1977 to June 1978.
Associate Professor of Economics, Arizona State University, September 1975 to June 1976.
Leave of Absence:
Visiting Assistant Professor of Economics, State University of New York at
Binghamton, September 1974 to August 1975.
Assistant Professor of Economics, Arizona State University, Tempe, Arizona, September

1971 to August 1975.
HONORS, GRANTS:
Principal Investigator, Department of Homeland Security, CREATE grant,

Understanding Counterterrorism in a Globalized World, $75,000, October 2006 to
September 2007; $100,000, August 2007 to September 2008.
Duncan Black Award for best article in Public Choice, 2005.
Co-recipient National Academy of Sciences Award for Behavioral Research Relevant to
the Prevention of Nuclear War, 2003.
Principal Investigator, Swedish Ministry of Foreign Affair, EGDI grant, Regional Public
Goods, $40,000, April 2001 to February 2002.
Honorary Visiting Professor, Department of Economics, University of York, October
1999-September 2002, October 2003 to September 2006.
Annual Award for Excellence in Honors Teaching for 1998. One award given per year
for best honors teacher at Iowa State University.
NATO-EAPC Research Fellowship, 1998-2000.
Quality of Communication Award, American Agricultural Economics Association 1998
for book, Global Challenges: An Approach to Environmental, Political, and
Economic Problems, first prize.
Quality of Communication Award, Honorable Mention, American Agricultural
Economics Association, 1997 for co-authored book, The Theory of Externalities,
Public Goods, and Club Goods, 2nd Edition.
Visiting Distinguished Scholar, University of Newcastle, Australia, May-June 1996.
Quality of Research Excellence Award, American Agricultural Economics Association,
August 1995 for co-authored paper, Agricultural Research Expenditures in the U.S.:
A Public Goods Perspective, first prize.
Liberal Arts and Sciences College Outstanding Teacher at the Introductory Level, 1995.
Visiting Fellow, Federalism Research Centre, Australian National University, May-July
1994.
Senior Fellow, Institute for Policy Reform, Washington, DC, 1994.
Principal Investigator, National Science Foundation grant SBR92-22953 Alternative
Theories and Tests of Alliance Behavior, Environmental Pacts, and Global Collective
Action, $85,680, June 1, 1993 to November 30, 1994.
Senior Fellow, Institute for Policy Reform, Washington, DC, 1990-91.
Principal Investigator, National Science Foundation grant SES89-07646 The Economics
of Terrorist Negotiations, The Effectiveness of Terrorist-Thwarting Policies, and
Related Issues, $97,711, July 1, 1989 to June 30, 1991.
Australian National University Fellowship, 1981.
NATO Postdoctoral Fellowship in the Sciences (NSF) June 1977 to June 1978.
National Defense Education Association Fellowship (Title IV) Texas A & M, September
1968.
State University of New York at Binghamton Fellowship, September 1969 to June 1970.
PROFESSIONAL ORGANIZATIONS:
American Economic Association
American Political Science Association
Association of Environmental and Resource Economists
China Economic Association
International Defense Economics Association
LIST Society
Public Choice Society
Public Economic Theorist Association
Royal Economic Society
Southern Economic Association
Western Economic Association
International Studies Association
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Exchange Rate Systems, the Marginal Efficiency of Investment and Foreign Direct Capital
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Multiregional Public Goods, Spillovers and the New Theory of Consumption, (with Jon
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The Externality Argument for In-Kind Transfers: A Defense, (with Ryan Amacher),
Kyklos, Vol. 30, No. 2, 1977, pp. 293-296.
The Design of Supranational Structures: An Economic Perspective, (with Jon Cauley),
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Intertemporal and Intergenerational Pareto Efficiency Revisited, (with V. Kerry Smith),
Journal of Environmental Economics and Management, Vol. 4, No. 3, September 1977,
pp. 252-257.
Impurity of Defense: An Application to the Economics of Alliances, Kyklos, Vol. 30, No.
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Interregional and Intergenerational Spillover Awareness, Scottish Journal of Political
Economy, Vol. 25, No. 3, November 1978, pp. 273-284.
Public Goods and the Theory of Second Best, Public Finance, Vol. 33, No. 3, 1978,
pp. 330-344.
A Hierarchical Theory of the Firm, (with Jon Cauley), Scottish Journal of Political
Economy, Vol. 27, No. 1, February 1980, pp. 17-29.
Burden Sharing, Strategy, and the Design of NATO, (with John Forbes), Economic
Inquiry, Vol. 18, No. 3, July 1980, pp. 425-444. Republished in James M. Buchanan and
Robert D. Tollison (eds.), Theory of Public Choice - II (Ann Arbor, MI: University of
Michigan Press, 1984), pp. 338-357.
In Defense of a Collective Goods Theory of Alliances, (with Jon Cauley and John Forbes),
Journal of Conflict Resolution, Vol. 24, No. 3, September 1980, pp. 537-547.
A General Theory of Interpersonal Exchange, (with Jon Cauley), Public Choice, Vol. 35,
No. 5, 1980, pp. 587-606.
The Economic Theory of Clubs: An Evaluative Survey, (with John Tschirhart), Journal of
Economic Literature, Vol. 18, No. 4, December 1980, pp. 1481-1521.
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21, No. 2, April 1981, pp. 371-393.
On the Number and Membership Size of Consumer-Managed Firms, (with John
Tschirhart), Southern Economic Journal, Vol. 47, No. 4, April 1981, pp. 1086-1091.
The Social Rate of Discount for Nuclear Waste Storage: Economics or Ethics? (with
William Schulze, David Brookshire), Natural Resources Journal, Vol. 21, No. 4, October
1981, pp. 811-832.
A Theory of Intergenerational Clubs, Economic Inquiry, Vol. 20, No. 2, April 1982, pp.
191-208.
A Theoretical and Empirical Analysis of NATO, (with James Murdoch), Journal of
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Joint Products and Multijurisdictional Spillovers, (with A. J. Culyer), Quarterly Journal of
Economics, Vol. 97, No. 4, November 1982, pp. 707-716.
Intertemporal and Intergenerational Pareto Efficiency: A Reconsideration of Recent
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Joint Products and Interjurisdictional Spillovers: Some Public Goods Geometry, (with A.
J. Culyer), Kyklos, Vol. 35, No. 4, 1982, pp. 702-709.
A Theoretical Analysis of Transnational Terrorism, (with John Tschirhart and Jon Cauley),
American Political Science Review, Vol. 77, No. 1, March 1983, pp. 36-54. Republished
in Rosemary OKane (ed.), Terrorism (Northampton, MA: Edward Elgar, 2005), pp. 444462.
Toward a Unified Theory of Nonmarket Institutional Structures, (with Jon Cauley and
John Tschirhart), Australian Economic Papers, Vol. 42, June 1983, pp. 233-254.
On Commons and Tragedies, (with Richard Cornes), American Economic Review, Vol. 73,
No. 4, September 1983, pp. 787-792.
Club Optimality: Further Clarifications, Economics Letters, Vol. 14, No. 1, 1984, pp.
61-65.
The Theory of Public Goods: Non-Nash Behavior, (with Richard Cornes), Journal of
Public Economics, Vol. 23, No. 3, April 1984, pp. 367-379.
Mixed Clubs: Further Observations, (with John Tschirhart), Journal of Public Economics,
Vol. 23, No. 3, April 1984, pp. 381-389.
Intertemporal Incentive Allocation in Simple Hierarchies, (with David Nickerson),
Mathematical Social Sciences, Vol. 7, No. 1, 1984, pp. 33-57.
Easy Riders, Joint Production, and Public Goods, (with Richard Cornes), Economic
Journal, Vol. 94, No. 3, September 1984, pp. 580-598.
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James Murdoch), Journal of Public Economics, Vol. 25, No. 1-2, November 1984, pp.
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On the Consistency of Conjectures with Public Goods, (with Richard Cornes), Journal of
Public Economics, Vol. 25, No. 1, June 1985, pp. 125-129.
Australian Demand for Military Expenditures: 1961-1979, (with James Murdoch),
Australian Economic Papers, Vol. 44, June 1985, pp. 142-153.
Uncertainty and Clubs, (with Fred Sterbenz and John Tschirhart), Economica, Vol. 52, No.
4, November 1985, pp. 467-477.
Joint Supply and the Finance of Charitable Activity, (with John Posnett), Public Finance
Quarterly, Vol. 14, No. 2, April 1986, pp. 209-222.
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Nonmarket Institutional Structures: Conjectures, Distribution, and Efficiency, (with Jon

Cauley and Richard Cornes), Public Finance, Vol. 41, No. 2, 1986, pp. 153-172.
Terrorist Success in Hostage-Taking Incidents: An Empirical Study, (with John Scott),
Journal of Conflict Resolution, Vol. 31, No. 1, March 1987, pp. 35-53.
Terrorism in a Bargaining Framework, (with Scott Atkinson and John Tschirhart), Journal
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On Optimal Prices and Animal Consumers in Congested Markets, Economic Inquiry, Vol.
25, No. 4, October 1987, pp. 715-720.
Free Riding and Uncertainty, (with Frederic Sterbenz and John Posnett), European
Economic Review, Vol. 31, No. 8, December 1987, pp. 1605-1617.
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Cornes), Journal of Environmental Economics and Management, Vol. 15, No.1, March
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Economic Review, Vol. 78, No. 2, May 1988, pp. 16-21.
The Calculus of Dissent: An Analysis of Terrorists' Choice of Targets, (with Harvey
Lapan), Synthse, Vol. 76, No. 2, August 1988, pp. 245-261.
Fighting World War III: A Suggested Strategy, (with Jon Cauley), Terrorism: An
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Transfers, Transaction Costs, and Charitable Intermediaries, (with John Posnett),
International Review of Law and Economics, Vol 8, No. 4, December 1988, pp. 145-160.
Externalities, Pigouvian Corrections, and Risk Attitudes, (with Frederic Sterbenz), Journal
of Environmental Economics and Management, Vol. 15, No. 4, December 1988, pp.
488-504.
On the Optimal Retaliation Against Terrorists: The Paid-Rider Option, (with Dwight Lee)
Public Choice, Vol. 61, No. 2, 1989, pp. 141-152.
Public Goods, Growth, and Welfare, (with Richard Cornes) Social Choice and Welfare,
Vol. 6, No. 3, July 1989, pp. 243-251.
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John Posnett), Journal of Public Economics, Vol. 40, No. 2, November 1989, pp.
187-200.
On Distinguishing the Behavior of Nuclear and Non-Nuclear Allies in NATO, (with
Laurna Hansen and James Murdoch), Defence Economics, Vol. 1, No. 1, January 1990,
pp. 37-55.
Harvest Uncertainty and the Tragedy of the Commons, (with Frederic Sterbenz), Journal
of Environmental Economics and Management, Vol. 18, No. 2, March 1990, pp. 155-167.
U.N. Conventions, Technology, and Retaliation in the Fight Against Terrorism: An
Econometric Evaluation, (with Walter Enders and Jon Cauley), Terrorism and Political
Violence, Vol. 2, No. 1, Spring 1990, 83-105.
A Diagrammatic Approach for Teaching Some Aspects of Production-Cost Duality,
Studies in Economic Analysis, Vol. 12, No. 2, Fall 1990, pp. 32-42.
Nash-Cournot or Lindahl Behavior? An Empirical Test for the NATO Allies, (with James
Murdoch), Quarterly Journal of Economics, Vol. 105, No. 4, November 1990, pp. 875894.
The Triple Entente and the Triple Alliance, 1890-1914: A Collective Goods Approach,
(with John A. C. Conybeare) American Political Science Review, Vol. 84, No. 4,
December 1990, pp. 1197-1206.
Assessing the Impact of Terrorist-Thwarting Policies: An Intervention Time Series
Approach, (with Walter Enders and Jon Cauley), Defence Economics, Vol. 2, No. 1,
December 1990, pp. 1-18.
Economic Analysis Can Help Fight International Terrorism, (with Walter Enders and
Harvey Lapan), Challenge, Vol. 34, No. 1, January/February 1991, pp. 10-17.
Republished in Bernard Schechterman and Martin Slann (eds.), Violence and Terrorism,
Annual Editions, Third Edition (Sluice Dock, CT: Dushkin Publishing Group, 1993), pp.
192-199.
The Private Provision of Public Goods: A Perspective on Neutrality, (with John Posnett),
Public Finance Quarterly, Vol. 19, No. 1, January 1991, pp. 22-42.
The Causality Between Transnational Terrorism and Tourism: The Case of Spain, (with
Walter Enders), Terrorism: An International Journal, Vol. 14, No. 1, January-March
1991, pp. 49-58.
NATO Burden Sharing and the Forces of Change: Further Observations, (with James
Murdoch), International Studies Quarterly, Vol. 35, No. 1, March 1991, pp. 109-114.
10
An Econometric Technique for Comparing Median Voter and Oligarchy Choice Models of
Collective Action: The Case of the NATO Alliance, (with James Murdoch and Laurna
Hansen), Review of Economics and Statistics, Vol. 73, No. 4, November 1991, pp. 624631.
Sharing Among Clubs: A Club of Clubs Theory, (with Frederic Sterbenz), Oxford
Economic Papers, Vol. 44, No. 1, January 1992, pp. 1-19.
Agency Theory and the Chinese Enterprise Under Reform, (with Jon Cauley), China
Economic Review, Vol. 3, No. 1, Spring 1992, pp. 39-56. Republished in Chinese in
Economic Science, No. 3, 1993, pp. 47-56.
After the Cold War, Secure the Global Commons, Challenge, Vol. 35, No. 4, July/August
1992, pp. 16-23.
Controlling Stock Externalities: Flexible Versus Inflexible Pigovian Corrections, (with IlDong Ko and Harvey Lapan), European Economic Review, Vol. 36, No. 6, August 1992,
pp. 1263-1276.
A Time-Series Analysis of Transnational Terrorism: Trends and Cycles, (with Walter
Enders and Gerald Parise), Defence Economics, Vol. 3, No. 4, November 1992, pp. 305320.
An Econometric Analysis of the Impact of Terrorism on Tourism, (with Walter Enders and
Gerald Parise), Kyklos, Vol. 45, No. 4, 1992, pp. 531-554.
Tropical Deforestation: Markets and Market Failures, Land Economics, Vol. 69, No. 3,
August 1993, pp. 225-233.
Multiproduct Clubs: Membership and Sustainability, (with John Tschirhart), Public
Finance, Vol. 48, No. 2, 1993, pp. 153-170.
The Economic Theory of Alliances: A Survey, Journal of Conflict Resolution, Vol. 37,
No. 3, September 1993, pp. 446-483.
Terrorism and Signalling, (with Harvey E. Lapan), European Journal of Political
Economy, Vol. 9, No. 3, 1993, pp. 383-397.
State-Sponsored Violence As a Tragedy of the Commons: England's Privateering Wars
with France and Spain, 1625-1630, (with John A. C. Conybeare), Public Choice, Vol.
77, No. 4, December 1993, pp. 879-897.
The Effectiveness of Anti-Terrorism Policies: A VAR-Intervention Analysis, (with Walter
Enders), American Political Science Review, Vol. 87, No. 4, December 1993, pp. 829844. An abbreviated version was republished in Terrorism, Violence, and Insurrections,
Vol. 11, No. 3, Summer 1995, pp. 1-5. Republished in War on Terrorism, edited by Alan
ODay (Aldershot, UK: Ashgate, 2004), pp. 401-416.
11
Rent Seeking and Pesticide Legislation, (with Sherry Wise), Public Choice, Vol. 78, No. 34, March 1994, pp. 329-350.
Agricultural Research Expenditures in the U.S.: A Public Goods Perspective, (with Jyoti
Khanna and Wallace Huffman), Review of Economics and Statistics, Vol. 76, No. 2, May
1994, pp. 267-277.
The Comparative Static Properties of the Impure Public Good Model, (with Richard
Cornes), Journal of Public Economics, Vol. 54, No. 3, July 1994, pp. 403-421.
Are Public Goods Myths?, (with Richard Cornes) Journal of Theoretical Politics, Vol. 6,
No. 3, 1994, pp. 369-385.
Alternative Collective-Goods Models of Military Alliances: Theory and Empirics, (with
John A. C. Conybeare and James Murdoch), Economic Inquiry, Vol. 32, No. 4, October
1994, pp. 525-542.
Growth and Defense: Pooled Estimates for the NATO Alliance, 1951-1988, (with
Elizabeth S. Macnair, James C. Murdoch and Chung-Ron Pi), Southern Economic
Journal, Vol. 61, No. 3, January 1995, pp. 846-860.
Charity Donations in the U.K.: New Evidence Based on Panel Data, (with Jyoti Khanna
and John Posnett), Journal of Public Economics, Vol. 56, No. 2, February 1995, pp. 257272. Republished in The Economics of Nonprofit Enterprises edited by Richard
Steinberg (Northampton, MA: Edward Elgar, 2005).
Privateering, State-Sponsored Violence as a Tragedy of the Commons: A Reply, (with
John A. C. Conybeare), Public Choice, Vol. 82, No. 3-4, March 1995, pp. 363-364.
Management of Transnational Commons: Coordination, Publicness, and Treaty Formation,
(with Keith Sargent), Land Economics, Vol. 71, No. 2, May 1995, pp. 145-162.
Republished in Governing the Global Environment edited by Carlo Carraro (Cheltenham,
UK: Edward Elgar, 2003).
On the Relationship between Democracy and Terrorism, Terrorism and Political Violence,
Vol. 7, No. 4, Winter 1995, pp. 1-9.
NATO Burden Sharing: 1960-1992, (with Jyoti Khanna), Defence and Peace Economics,
Vol. 7, No. 2, May 1996, pp. 115-133.
A Game-Theoretic Analysis of Carbon Emissions, in Roger Congleton (ed.), The Political
Economy of Environmental Protection: Analysis and Evidence (Ann Arbor: University
of Michigan Press, 1996), pp. 251-272.
Terrorism and Foreign Direct Investment in Spain and Greece, (with Walter Enders),
Kyklos, Vol. 49, No. 3, 1996, pp. 331-352.
A Multiproduct Club Approach to Transportation Infrastructure Pricing, (with Michael A.
Lipsman), Public Finance, Vol. 51, No. 4, Supplement 1996, pp. 453-472.
12
The Voluntary Provision of a Pure Public Good: The Case of Reduced CFC Emissions and
the Montreal Protocol, (with James C. Murdoch), Journal of Public Economics, Vol. 63,
No. 2, February 1997, pp. 331-349. Republished in The Political Economy of
Environmental Regulation edited by Robert N. Stavins (Northampton, MA: Edward
Elgar, 2004).
Voluntary Cutbacks and Pre-Treaty Behavior: The Helsinki Protocol and Sulfur
Emissions, (with James C. Murdoch), Public Finance Review, Vol. 25, No. 2, March
1997, pp. 139-162.
Conscription, Peacekeeping, and Foreign Assistance: NATO Burden Sharing in the PostCold War Era, (with Jyoti Khanna), Defence and Peace Economics, Vol. 8, No. 1,
March 1997, pp. 101-121.
The Impact of Defense and Nondefense Public Spending on Growth in Asia and Latin
America, (with James C. Murdoch and Chung-Ron Pi), Defence and Peace Economics,
Vol. 8, No. 2, April 1997, pp. 205-224.
A Tale of Two Collectives: Sulfur Versus Nitrogen Oxides Emission Reduction in Europe,
(with James C. Murdoch and Keith Sargent), Economica, Vol. 64, No. 2, May 1997, pp.
281-301.
Collective Action and Tropical Deforestation, International Journal of Social Economics,
Vol. 24, No. 7-9, 1997, pp. 741-760.
The Future Challenges of NATO: An Economic Viewpoint, Defence and Peace
Economics, Vol. 8, No. 4, November 1997, pp. 319-353.
Club Theory: Thirty Years Later, (with John Tschirhart), Public Choice, Vol. 93, No.3-4,
December 1997, pp. 335-355.
The Intergenerational Case of Missing Markets and Missing Voters, (with Jacobus A.
Doeleman), Land Economics, Vol. 74, No. 1, February 1998, pp. 1-15.
Sharing the Financial Burden for UN and NATO Peacekeeping: 1976-96, (with Jyoti
Khanna and Hirofumi Shimizu), Journal of Conflict Resolution, Vol. 42, No. 2, April
1998, pp. 176-195.
When Does Partial Cooperation Pay?, (with Wolfgang Buchholz and Christian Haslbeck),
Finanzarchiv, Vol. 55, No. 1, 1998, pp. 1-20.
Global and Regional Public Goods: A Prognosis for Collective Action, Fiscal Studies,
Vol. 19, No. 3, August 1998, pp. 221-247.
Transnational Terrorism in the Post-Cold War Era, (with Walter Enders), International
Studies Quarterly, Vol. 43, No. 1, March 1999, pp. 145-167. Republished in Dimensions
of Terrorism edited by Alan ODay (Aldershot, UK: Ashgate, 2004), pp. 475-497.
13
Intergenerational Public Goods: Strategies, Efficiency and Institutions, in Inge Kaul,

Isabelle Grunberg, and Marc A. Stern (eds.), Global Public Goods: International
Cooperation in the Twenty-First Century (New York: Oxford University Press, 1999),
pp. 20-50. Republished in Governing the Global Environment, edited by Carlo Carraro
(Cheltenham, UK: Edward Elgar, 2003), pp. 104-134.
The Demand for UN Peacekeeping, 1975-96, (with Jyoti Khanna and Hirofumi Shimizu),
Kyklos, Vol. 52, No. 3, 1999, pp. 345-68.
Equilibrium Existence and Uniqueness in Public Good Models: An Elementary Proof via
Contraction, (with Richard Cornes and Roger Hartley), Journal of Public Economic
Theory, Vol. 1, No. 4, October 1999, pp. 499-509.
NATO Burden Sharing: Past and Future, (with Keith Hartley), Journal of Peace Research,
Vol. 36, No. 6, November 1999, pp. 665-680.
Stakeholder Incentives and Reforms in Chinas State-Owned Enterprises: A CommonProperty Theory, (with Jon Cauley and Richard Cornes), China Economic Review, Vol.
10, No. 2, Fall 1999, pp. 191-206.
Alliance Formation, Alliance Expansion, and the Core, Journal of Conflict Resolution, Vol.
43, No. 6, December 1999, pp. 727-747. Republished in Arms Trade, Security and
Conflict, edited by Paul Levine and Ron Smith (London: Routledge, 2003), pp. 137-157.
Defence and Peace Economics: A Ten-Year Retrospective, (with Keith Hartley), Defence
and Peace Economics, Vol. 11, No. 1, February 2000, pp. 1-16.
Pareto-Improving Redistribution and Pure Public Goods, (with Richard Cornes), German
Economic Review, Vol. 1, No. 2, May 2000, pp. 169-186.
Is Transnational Terrorism Becoming More Threatening? A Time-Series Investigation,
(with Walter Enders), Journal of Conflict Resolution, Vol. 44, No. 3, June 2000, pp. 307332.
Partners in Giving: The Crowding-In Effects of UK Government Grants, (with Jyoti
Khanna), European Economic Review, Vol. 44, No. 8, August 2000, pp. 1543-1556.
Arms Trade, Arms Control and Security: Collective Action Issues, Defence and Peace
Economics, Vol. 11, No. 5, September 2000, pp. 533-548. Republished in Arms Trade,
Security and Conflict, edited by Paul Levine and Ron Smith (London: Routledge, 2003),
pp. 209-220.
On Sharing NATO Defense Burdens in the 1990s and Beyond, (with James C. Murdoch),
Fiscal Studies, Vol. 21, No. 3, September 2000, pp. 297-327. Republished in The
Economics of Public Spending, edited by David Miles, Gareth Myles, and Ian Preston
(Oxford: Oxford University Press, 2003), pp. 237-266.
Economic Analysis of Conflict, Journal of Conflict Resolution, Vol. 44, No. 6, December
2000, pp. 723-729.
14
Models of Alliances: Internalizing Externalities and Financing, (with Kevin Siqueira),

Defence and Peace Economics, Vol. 12, No. 3, May 2001, pp. 249-270.
Transnational Public Goods: Strategies and Institutions, (with Daniel G. Arce M.), European
Journal of Political Economy, Vol. 17, No. 3, September 2001, pp. 493-516.
Economics of Alliances: The Lessons of Collective Action, (with Keith Hartley), Journal of
Economic Literature, Vol. 39, No. 3, September 2001, pp. 869-896.
A Cooperative Game Theory of Noncontiguous Allies, (with Daniel G. Arce M.), Journal of
Public Economic Theory, Vol. 3, No. 4, October 2001, pp. 391-411.
Weakest-Link Public Goods: Giving In-Kind or Transferring Money in a Sequential Game,
(with Simon Vicary), Economics Letters, Vol. 74, No. 1, 2001, pp. 71-75.
Agency Cost and the Crisis of China's SOEs: A Comment and Further Observations, (with
Jon Cauley), China Economic Review, Vol. 12, No. 4, 2001, pp. 293-297.
Economic Growth, Civil Wars, and Spatial Spillovers, (with James C. Murdoch), Journal of
Conflict Resolution, Vol. 46, No. 1, February 2002, 91-110.
On Financing Global and International Public Goods, in Marco Ferroni and Ashoka Mody
(eds.), International Public Goods: Incentives, Measurement, and Financing (Dordecht,
NL: Kluwer, 2002), pp. 81-117.
Patterns of Transnational Terrorism, 1970-99: Alternative Time Series Estimates, (with
Walter Enders), International Studies Quarterly, Vol. 46, No. 2, June 2002, pp. 145-165.
A Conceptual Framework for Understanding Global and Transnational Public Goods for
Health, (with Daniel G. Arce M.), Fiscal Studies, Vol. 23, No. 2, June 2002, pp. 195-222.
Weakest-Link Public Goods: Giving In-Kind or Transferring Money, (with Simon Vicary),
European Economic Review, Vol. 46, No. 8, October 2002, pp. 1501-1520.
Peacekeeping and Burden Sharing: 1994-2000, (with Hirofumi Shimizu), Journal of Peace
Research, Vol. 39, No. 6, November 2002, pp. 651-668.
Assessing the Optimal Provision of Public Goods: In Search of the Holy Grail, in Inge Kaul,
Pedro Conceio, Katell Le Goulven, and Ronald U. Mendoza (eds.), Providing Global
Public Goods: Managing Globalization (New York: Oxford University Press, 2002), pp.
131-151.
Economic Analysis of Civil Wars, (with Hvard Hegre), Defence and Peace Economics,
Vol. 13, No. 6, December 2002, pp. 429-433.
Civil Wars and Economic Growth: A Regional Comparison, (with James C. Murdoch),
Defence and Peace Economics, Vol. 13, No. 6, December 2002, pp. 451-464.
15
The Participation Decision Versus the Level of Participation in an Environmental Treaty: A

Spatial Probit Analysis, (with James C. Murdoch and Wim Vijverberg), Journal of Public
Economics, Vol. 87, No. 2, February 2003, pp. 337-362.
An Evolutionary Game Approach to Fundamentalism and Conflict, (with Daniel G. Arce
M.), Journal of Institutional and Theoretical Economics, Vol. 159, No. 1, March 2003, pp.
132-154.
NATO Peacekeeping and Burden Sharing: 1994-2000, (with Hirofumi Shimizu), Public
Finance Review, Vol. 31, No. 2, March 2003, pp. 123-143.
Health-Promoting Alliances, (with Daniel G. Arce M.), European Journal of Political
Economy, Vol. 19, No. 2, June 2003, pp. 355-375.
Collective Action and Transnational Terrorism, World Economy, Vol. 26, No. 6, June 2003,
pp. 779-802.
Pure Public Goods versus Commons: Benefit-Cost Duality, (with Daniel G. Arce M.), Land
Economics, Vol. 79, No. 3, August 2003, pp. 355-368.
Terrorism and Game Theory, (with Daniel G. Arce M.), Simulation & Gaming, Vol. 34, No.
3, September 2003, pp. 319-337.
The Future of the Defence Firm, (with Keith Hartley), Kyklos, Vol. 56, No. 3, 2003, pp. 361380.
Civil Wars and Economic Growth: Spatial Dispersion, (with James C. Murdoch), American
Journal of Political Science, Vol. 48, No.1, January 2004, pp. 138-151.
Collective Goods, Common Agency, and Third-Party Intervention, (with Kevin Siqueira),
Bulletin of Economic Research, Vol. 56, No.1, January 2004, pp. 1-20.
An Economic Perspective on Transnational Terrorism, (with Walter Enders), European
Journal of Political Economy, Vol. 20, No. 2, June 2004, pp. 301-316. Republished in The
Economic Analysis of Terrorism, edited by Tilman Brck (Abingdon, UK: Routledge,
2007), pp. 13-28.
Too Much of a Good Thing? The Proactive Response Dilemma, (with B. Peter Rosendorff),
Journal of Conflict Resolution, Vol. 48, No. 5, October 2004, pp. 657-671.
Transnational Terrorism 1968-2000: Thresholds, Persistence, and Forecasts, (with Walter
Enders), Southern Economic Journal, Vol. 71, No. 3, January 2005, pp. 467-483.
The Dilemmas of the Prisoners Dilemmas, (with Daniel G. Arce M.), Kyklos, Vol. 58, No.
1, January 2005, pp. 3-24.
September 11 and Its Aftermath, (with Walter Enders), International Studies Review, Vol. 7,
No. 1, March 2005, pp. 65-168.
16
Counterterrorism: A Game-Theoretic Analysis, (with Daniel G. Arce M.), Journal of

Conflict Resolution, Vol. 49, No. 2, April 2005, pp. 83-200.
After 9/11: Is It All Different Now? (with Walter Enders), Journal of Conflict Resolution,
Vol. 49, No. 2, April 2005, pp. 259-277.
Collective versus Unilateral Responses to Terrorism, Public Choice, Vol. 124, No. 1, July
2005, pp. 75-93.
NATO Benefits, Burdens, and Borders: Comment, Defence and Peace Economics, Vol. 16,
No. 4, August 2005, pp. 317-321.
Donors Mechanisms for Financing International and National Public Goods: Loan or
Grants?, (with Raechelle Mascarenhas), World Economy, Vol. 28, No. 8, August 2005,
pp. 1095-1117.
Recognizing the Limits to Cooperation behind National Borders: Financing the Control of
Transnational Terrorism, in Inge Kaul and Pedro Conceio, (eds), The New Public
Finance: Responding to Global Challenges (New York: Oxford University Press, 2006)
pp. 194-216.
Regional Public Goods and International Organizations, Review of International
Organizations, Vol. 1, No. 1, March 2006, pp. 5-25.
Distribution of Transnational Terrorism among Countries by Income Classes and
Geography after 9/11, (with Walter Enders), International Studies Quarterly, Vol. 50,
No. 2, June 2006, pp. 367-393.
CBRN Incidents: Political Regimes, Perpetrators, and Targets, (with Kate Ivanova),
Terrorism and Political Violence, Vol. 18, No. 3, Fall 2006, pp. 423-448.
Global Terrorism: Deterrence versus Preemption, (with Kevin Siqueira), Canadian
Journal of Economics, Vol. 50, No. 4, November 2006, pp. 1370-1387.
Do Donors Cooperatively Fund Foreign Aid?, (with Raechelle Mascarenhas), Review of
International Organizations, Vol. 1, No. 4, 2006, pp. 337-357.
The Impact of Transnational Terrorism on US Foreign Direct Investment, (with Walter
Enders and Adolfo Sachsida), Political Research Quarterly, Vol. 59, No. 4, December
2006, pp. 517-531.
Terrorists Versus the Government: Strategic Interaction, Support, and Sponsorship, (with
Kevin Siqueira), Journal of Conflict Resolution, Vol. 50, No. 6, December 2006, pp. 878898.
Hirshleifers Social Composition Function in Defense Economics. Defence and Peace
Economics, Vol. 18, No. 6, December 2006, pp. 645-655.
17
New Face of Development Assistance: Public Goods and Changing Ethics, (with Daniel G.
Arce), Journal of International Development, Vol. 19, No. 4, May 2007, pp. 527-544.
Republished in Reflexive Governance for Global Public Goods, edited by Eric
Brousseau, Tom Dedeurwaerdere, and Bernd Siebenhner (Cambridge, MA: MIT Press)
forthcoming 2008.
Applying Analytical Methods to Study Terrorism, (with Walter Enders), International
Studies Perspectives, Vol. 8, No. 3, August 2007, pp. 287-302.
CBRN Attack Perpetrators: An Empirical Study, (with Kate Ivanova) Foreign Policy
Analysis, Vol. 3, No. 4, October 2007, pp. 273-294.
Terrorist Signalling and the Value of Intelligence, (with Daniel G. Arce) British Journal of
Political Science, Vol. 37, No. 4, October 2007, pp. 573-586.
Terrorist Backlash, Terrorism Mitigation, and Policy Delegation, (with Kevin Siqueira),
Journal of Public Economics, Vol. 91, No. 9, pp. 1800-1815.
Economic Consequences of Terrorism in Developed and Developing Countries: An
Overview, (with Walter Enders) in Philip Keefer and Norman Loayza (eds.), Terrorism
and Economic Development (Cambridge: Cambridge University Press, 2008), pp. 17-47,
forthcoming.
Treaties: Strategic Considerations, University of Illinois Law Review, Vol. 2008, No. 1,
forthcoming.
9/11: What Did We Know and When Did We Know It, (with Walter Enders and Beom S.
Lee), Defence and Peace Economics, Vol. 19, forthcoming 2008.
IMF Retrospective and Prospective: A Public Goods Viewpoint, (with Joseph P. Joyce),
Review of International Organizations, forthcoming 2008.
Defensive Counterterrorism Measures and Domestic Politics, (with Kevin Siqueira),
Defence and Peace Economics, Vol. 19, forthcoming 2008.
Hostage Taking: Understanding Terrorism Event Dynamics, (with Patrick Brandt), Journal
of Policy Modeling, forthcoming 2008.
BOOKS:
Public Goods and Public Policy (edited with William Loehr), (Beverly Hills, California:
Sage Publications, Inc., 1978), 240 pages.
The Political Economy of Public Goods and International Cooperation, (with William Loehr
and Jon Cauley), Monograph Series in World Affairs, Vol. 15, Book 3, University of
Denver, Graduate School of International Studies, 1978, 98 pages.
The Theory and Structures of International Political Economy (edited book), (Boulder,
Colorado: Westview Press, 1980), 280 pages.
18
The Theory of Externalities, Public Goods, and Club Goods (with Richard Cornes), (New
York: Cambridge University Press, 1986), 303 pages.
International Terrorism in the 1980s: A Chronology of Events, Volume 1, 1980-1983 (with
Edward Mickolus and Jean Murdock), (Ames, Iowa: Iowa State University Press, 1988),
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Edward Mickolus and Jean Murdock), (Ames, Iowa: Iowa State University Press, 1989),
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The Economics of Defence Spending: An International Survey (edited with Keith Hartley),
(London: Routledge, 1990), 285 pages.
Collective Action: Theory and Applications (Ann Arbor, Michigan: University of Michigan
Press, 1992), 237 pages.
The Economics of Defense (with Keith Hartley), (Cambridge: Cambridge University Press,
1995), 400 pages. Republished in Japanese, Shoichi Fukaya translator (Tokyo: Nihon
Hyoronsha Publishing Company, 1999); Republished in Chinese (Beijing: Beijing
Institute of Technology Press, 2007).
Handbook of Defense Economics, vol. 1 (co-edited book with Keith Hartley) (Amsterdam:
North Holland, 1995), 606 pages. Republished in Chinese (Beijing: Economic Science
Press, 2004).
The Theory of Externalities, Public Goods, and Club Goods, Second Edition (with Richard
Cornes), (New York: Cambridge University Press, 1996), 590 pages.
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(Cambridge: Cambridge University Press, 1997), 234 pages.
The Political Economy of NATO: Past, Present, and Into the 21st Century (with Keith
Hartley), (Cambridge: Cambridge University Press, 1999), 292 pages.
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19
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Economics, 3 Volumes (Aldershot, UK: Edward Elgar, 2003), 2100 pages.
Global Collective Action (Cambridge: Cambridge University Press, 2004), 299 pages.
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University Press 2006), 278 pages.
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OTHER PUBLICATIONS:
Devaluation: An Analysis and Some Timely Questions, Arizona Business, Volume 19, No.
2, February 1972, pp. 18-24.
The Dynamic Price Expectation Effect of Devaluation, (with Nobuo Minabe), Osaka City
University Economic Review, January 1973, No. 8, pp. 13-23.
International Monetary Reforms, Arizona Business, Volume 20, No. 1, January 1973, pp.
17-24.
Dollars, Deficits, and Devaluation, (with Elmer Gooding), Arizona Business, Volume 20,
No. 5, May 1973, pp. 10-16.
The Demand for International Reserves: A Respecification, (with Shigeo Minabe), The
Hikone Ronso, No. 29, August 1973, pp. 1-11.
Domestic and International Policy Implications of the Inflation-Unemployment Trade-Off,
(with Phil Graves), Akron Business and Economic Review, Volume 5, No. 2, Summer
1974, pp. 9-14.
On the Public Character of Goods, (with William Loehr), in W. Loehr and T. Sandler
(eds.), Public Goods and Public Policy (Beverly Hills, California: Sage Publications,
Inc., 1978), pp. 11-37.
Explorations in the Economics of Outer Space, (with William Schulze), in Todd Sandler
(ed.), The Theory and Structures of International Political Economy (Boulder, Colorado:
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Outer Space: The New Market Frontier, (with William Schulze), Economic Affairs, Vol. 5,
No. 4, July-September 1985, pp. 6-10.
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in David Denoon (ed.), Constraints on Strategy: The Economics of Western Security
(New York: Pergamon-Brassey, 1986), pp. 59-113.
20
Economic Methods and the Study of Terrorism, (with Scott Atkinson et al.), in Paul
Wilkinson and A. W. Stewart (eds.), Contemporary Research on Terrorism (Aberdeen,
Scotland: Aberdeen University Press, 1987), pp. 376-389.
NATO Burden Sharing: Rules or Reality? in the International Economic Association 1985
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Britain, Europe, and the Atlantic Alliance, Institute of Economic Affairs, IEA Inquiry
Paper No. 10, London: IEA, September 1989.
Swedish Military Expenditures and Armed Neutrality, (with James Murdoch), in Keith
Hartley and Todd Sandler (eds.), The Economics of Defence Spending: An International
Survey (London: Routledge, 1990), pp. 148-176.
On Terrorism, Guerrilla Warfare, and Insurrections, Defence Economics, Vol. 3, No. 4,
November 1992, pp. 259-261.
Terrorism: Theory and Applications, (with Walter Enders) in Keith Hartley and Todd
Sandler (eds.), Handbook of Defense Economics (Amsterdam: North-Holland, 1995), pp.
213-249.
The Future of NATO, Economic Affairs, Vol. 17(4), December 1997, pp. 15-21.
Os Desafios NATO na regio do Mediterrneo e em outras reas, Economia & Defesa,
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A Radical Approach to Development Assistance, (with Ravi Kanbur and Kevin M.
Morrison), Development Outreach, Vol. 1, No. 2, Fall 1999, pp. 15-17.
Challenges to NATO in the Mediterranean and Beyond, in Jurgen Brauer and Keith
Hartley (eds.), The Economics of Regional Security: NATO, The Mediterranean, and
Southern Africa (Reading, UK: Harwood Academic Publishers, 2000), pp. 71-92.
On Partnerships, CDF, and Collective Action, posted at World Bank website:
http://www.worldbank.org/html/oed/topics/cdfproceedings/pdfs/annex_sandler.pdf.
Financing Global and International Public Goods, in Christopher D. Gerrard, Marco
Ferroni, and Ashoka Mody (eds.), Global Public Policies and Programs: Implications
for Financing and Evaluation (Washington, DC: Operations Evaluation Department,
World Bank, 2001), pp. 183-192.
Understanding Global Public Goods, OECD Observer, No. 228, September 2001, pp. 1517.
What Economics Tells Us to Prevent Terrorism, An Interview in Challenge, Vol. 45, No.
3, May/June 2002, pp. 5-12.
21
Nash, Game Theory, and Global Challenges, in Constantina Kottaridi and Gregorios
Siourounis (eds.), Game Theory: A Festschrift in Honor of John F. Nash Jr. (published in
Greek, Athens: Eurasia Publications, 2002), pp. 148-152.
Terrorism and Game Theory, An Interview, Swiss Military Review, No. 12, December
2002, pp. 4-5.
Global Challenges and the Need for Supranational Infrastructure, in Omar Azfar and
Charles Cadwell (eds.), Market-Augmenting Government: The Institutional Foundations
for Prosperity (Ann Arbor, MI: University of Michigan Press, 2003), pp. 269-294.
Biosphere, Markets, and Governments: Comment, in Omar Azfar and Charles Cadwell
(eds.), Market-Augmenting Government: The Institutional Foundations for Prosperity
(Ann Arbor, MI: University of Michigan Press, 2003), pp. 175-176.
What Do We Know about the Substitution Effect in Transnational Terrorism, in Andrew
Silke (ed.), Researching Terrorism: Trends, Achievements, Failures (Ilford, UK: Frank
Cass, 2004), pp. 119-137.
Regional Public Goods: Demand and Institutions, in Antoni Estevadeoral, Brian Frantz,
and Tam Nguyen (eds.) Regional Responses to Globalization: Regional Public Goods
and Development Assistance (Washington, DC: Inter-American Development Bank and
Asian Development Bank, 2004), pp. 11-30.
Regional Public Goods: The Comparative Edge of Regional Development Banks:
Comments, in Nancy Birdsall and Liliana Rojas-Suarez (eds.), Financing Development:
The Power of Regionalism (Washington, DC: Center for Global Development, 2004), pp.
123-127.
The Political Economy of Transnational Terrorism, (with B. Peter Rosendorff), Journal of
Conflict Resolution, Vol. 49, No. 2, April 2005, pp. 171-182.
Introduction: Security Challenges and Threats in a Post-9/11 World, (with Carlos P.
Barros and Christos Kollias), Defence and Peace Economics, Vol. 16, No. 5, October
2005, pp. 327-329.
Transnational Terrorism: An Economic Analysis, in Harry W. Richardson, Peter Gordon,
and James E. Moore II (eds.), The Economic Impact of Terrorist Attacks (Aldershot, UK:
Edward Elgar, 2005), pp. 11-34.
Economic Methods and the Study of Terrorism: An Evaluation, in Jeffrey Victoroff (ed.),
Tangled Roots: Social and Psychological Factors in the Genesis of Terrorism
(Amsterdam: IOS Press, 2006), pp. 115-129.
Regional Public Goods and Regional Cooperation, in Secretariat of the International Task
Force on Global Public Goods (ed.), Meeting Global Challenges: International
Cooperation in the National Interest: Cross-Cutting Issues (Stockholm: Secretariat,
2006), pp. 143-178.
22
Terrorism: A Game-Theoretic Approach, (with Daniel G. Arce) in Todd Sandler and Keith
Hartley (eds.), Handbook of Defense Economics, Vol. 2 (Amsterdam: North-Holland,
2007), pp. 775-813.
Defense in a Globalized World: An Introduction, (with Keith Hartley) in Todd Sandler and
Keith Hartley (eds.), Handbook of Defense Economics, Vol. 2 (Amsterdam: NorthHolland, 2007), pp. 607-621.
DATA SET:
International Terrorism: Attributes of Terrorist Events 1978-1987 (ITERATE 3) (with
Edward Mickolus, Jean Murdock, and Peter Fleming). Distributed by Vinyard Software,
Inc., Falls Church, VA, 1989. Update 1988-1989 (ITERATE 4) Vinyard Software, Inc.,
Falls Church, VA, 1990.
EDITING AND OTHER ACTIVITIES:
Editorial Board, International Studies Perspectives, January 2007 on.
Editorial Board, American Journal of Political Science, January 2006-December 2008.
Associate Editor, Review of International Organizations, January 2006 on.
Co-Editor of special issue of Defence and Peace Economics on Security Challenges and
Threats in a Post-9/11 World, Vol. 16, No. 5, October 2005.
Co-Editor of special issue of Journal of Conflict Resolution on The Political Economy

of Terrorism, Vol. 49, No. 2, April 2005.
Chairman, Editorial Board, Journal of Conflict Resolution, April 2004 on.
Co-Editor of special issue of Defence and Peace Economics on Internal and External
Threats: Defence Economics Analysis, Vol. 14, No. 6, December 2003.
Co-Editor of special issue of Defence and Peace Economics on Economic Analysis of

Civil Wars, Vol. 13, No. 6, December 2002.
Editorial Board, Terrorism and Political Violence, January 2004 on.
Editorial Board, Nao e Defesa, March 2002 on.
Editorial Board, European Review of Economics and Finance, January 2002 on.
Editorial Board, Public Finance Review, July 2000 on.
Editorial Board, Fiscal Studies, June 2000 on.
23
Guest Editor of special issue of Journal of Conflict Resolution on Economic Analysis of

Conflict, Vol. 44, No. 6, December 2000.
Co-Editor of Tenth Anniversary issue of Defence and Peace Economics, Vol. 11, No. 1,
February 2000.
Associate Editor, Bulletin of Economic Research, February 2000 on.
Advisory Board on book series, Institutional Analysis, University of Michigan Press,

edited by Workshop in Political Theory and Policy Analysis, Indiana University, 1999
on.
Editorial Board, International Studies Quarterly, January 1999-December 2003, January

2004-December 2007.
Associate Editor, Journal of Public Economic Theory, May 1997-December 2005.
Editorial Board, Social Science Quarterly, March 1996-April 2005.
Editorial Board, Defence and Peace Economics, January 1995 on. Advising Editor from
January 1999 on.
Editorial Council on Journal of Environmental Economics and Management, January

1986 to December 1987, reappointed for January 1992-December 1993, reappointed for
January 1994 December 1995, January-December 1996, January-December 1997,
January-December 1998, January-December 1999, January-December 2000, JanuaryDecember 2001.
Editorial Board on Monograph Series in World Affairs, University of Denver, Graduate

School of International Studies, 1979 on.
Editor of Defence Economics, September 1988-December 1994. (First issue appeared

January 1990).
Editor of special issue of Defence Economics on Terrorism, Guerrilla Warfare, and

Insurrections, Vol. 3, No. 4, November 1992.
Executive Board, International Defense Economics Association, 1990 on.
Executive Board Member of Economists Allied Against the Arms Race (ECAAR), Israel
Section, 1994 on.
Associate Editor of Journal of Environmental Economics and Management, January

1988 to January 1990.
24
Advising Board Member for Annual Editions: Violence and Terrorism, Duskin
Publishing Group, 1989 on.
Co-editor of Journal of Conflict Resolution for the June 1982 issue.
Editorial Board on Sage Series on Comparative Economy and Public Policy, 1975 to
1978.
Associate Editor, Intermountain Economic Review, September 1972 to June 1974.
Reviewer for NSF, major economics journals, and major political science journals.
DISSERTATIONS DIRECTED:
Murdoch, James. Contribution to the Economics of Military Alliances, defended in
October 1982. He is professor of economics at University of Texas-Dallas.
Sepassi, Reza. A Contribution to the Theory of Clubs, defended in January 1983.
Ko, Il-Dong. Issues in the Control of Stock Externality Problems with Inflexible Policy
Measures, defended on September 1988 (received Research Excellence Award from
ISU). He is a research fellow at Korea Development Institute.
Khanna, Jyoti. Theory and Econometric Analysis of State Government Demand for Public
Agricultural Research, defended on February 28, 1990. She is an associate professor of
economics at Colgate University.
Wise, Sherry. Rent-Seeking in Pesticide Policy, defended on June 2, 1991. She is an
economic analyst at the Environmental Protection Agency, Washington, DC.
Lipsman, Michael. A Theory of Transportation Clubs with Special Application to the
Domestic Aviation System, defended on November 9, 1994. He is an economic analyst
at Iowa Legislative Fiscal Bureau, State Capital, Des Moines.
Sargent, Keith. A Spatial Econometric Model for Transboundary Air Pollution Control
Treaties: An Analysis of Noncooperative International Behavior, defended on March
26, 1997. He is an economic analyst at the Environmental Protection Agency,
Washington, DC.
Siqueira, Kevin. Issues of Collective Action: Common Agency, Partial Cooperation, and
Clubs, defended on August 26, 1998. He is an associate professor at University of
Texas at Dallas.
Shimizu, Hirofumi. UN Peacekeeping as a Public Good: Analyses of the UN Member
States' Peacekeeping Financial Contribution Behavior, defended on August 13, 1999.
He is an Assistant Professor at the National Defense Academy in Japan.
25
Yang, Chia-yen. The Institutional Choice of Public Good Provision, defended on March
29, 2000.
McCulloch, Russel. Impure Thoughts of Charitable Giving, defended on January 24,
2003.
Mascarenhas, Raechelle, An Empirical Analysis of Foreign Aid and the Provision of
International Public Goods, defended June 6, 2005. She is an assistant professor at
Whitman College, Walla Walla, WA.
Ivanova, Kate, Corruption, Rule of Law and International Interaction in Environment
Pollution and CBRN Terrorism, defended June 28, 2006. She is an assistant professor at
The Ohio State University at Newark. Awarded honorable mention as best dissertation
for 2006 at USC College of Liberal Arts and Sciences.
MASTERS DIRECTED:
Hansen, Laurna. Conventional Versus Strategic Expenditures in NATO: A Public Goods
Approach, defended on June 28, 1988 (received Research Excellence Award from ISU).
She is a research associate at the Sandia National Laboratory, Livermore, CA.
Tanner, Thomas Cole. The Spatial Theory of Elections: An Analysis of Voters' Predictive
Dimensions and Recovery of the Underlying Issue Space, defended on April 12, 1994
(received a Research Excellence Award from ISU).
Holland, Stephen P. Some Economic Policies for Ameliorating the Tragedy of the
Commons, defended on May 13, 1994. He received a fellowship as a Ph.D. student in
economics at University of Michigan.
Twait, Christine. Determining the Barriers to Small Business Pollution Prevention,
defended on April 19, 1995 (received a Research Excellence Award from ISU). She is a
grant coordinator in the Business College, University of Northern Iowa, Waterloo, IA.
Kondo, Masahiro. Theoretical and Empirical Analysis of Military Expenditures of Japan,
South Korea, and North Korea, defended on May 6, 1998.
Alonso, Julio C. Narcotraffic, Guerrilla Warfare, and Antinarcotics Foreign Aid, defended
on July 5, 2000.
CONSULTANCY:
1980 on
Consultant to book publishers
1984-1999
Consultant for James Savarese & Associates, a division of Ogilvy

& Mather, Public Relations Firm.
26
October 1983 to
October 1984
Consultant on The Economics of Defense in 1980s, A

grant given by the Office of Net Assessment, Department of
Defense. Principal investigator in charge of the assessment of the
U.K., France, and West German's future in NATO. Project
coordinator was David Denoon, New York University.
Summer 1987
Consultant with David Denoon, James Murdoch on a project for

U.S. Department of Defense.
September 1990-96
Consultant for Institute of Defense Analyses, Alexandria, VA.
1998-99, 2001-05
Consultant and author for Global Public Goods Projects for UN

Development Program.
1999
Author of paper for a project, Market Augmenting Governance,

IRIS, University of Maryland.
1999
Project on reforming foreign assistance for Overseas Development

Council.
1999-2002, 2005
Consultant for World Bank on various projects.
2001
Author of paper for a project on Health-Promoting Global Public

Goods, Institute for Global Health, University of California at San
Francisco.
2002
Consultant for Inter-American Development Bank on projects on

Regional Public Goods
2004-2005
Consultant for the International Task Force for Global Public

Goods, Stockholm, Sweden.
2006-2007
Senior advisor on global public goods for UNIDO, Geneva,

Switzerland.

Economics, Game Theory and Terrorism (Walter Enders, Todd Sandler)

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PATTERNS OF TRANSNATIONAL TERRORISM, 1970-99:

ALTERNATIVE TIME SERIES ESTIMATES

Revised: October 2001

e-mail of corresponding author: tsandler@usc.edu

PATTERNS OF TRANSNATIONAL TERRORISM, 1970-99:

PATTERNS OF TRANSNATIONAL TERRORISM, 1970-99:

On the morning of 11 September 2001, the world watched in horror as 19 hijackers

INTERVENTIONS AND THE DATA

DUMMY VARIABLES VERSUS THE THRESHOLD MODEL

AIC = 1008.2, SBC = 1030.4, (6)

AIC = 1006.3, SBC = 1022.9.

THE ESTIMATED THRESHOLD MODEL

We begin by estimating the DEATH series as a threshold autoregressive process with a

yt = [ 19.95 + 0.07yt-1 ] It + [ 7.09 + 0.47yt-1 ] (1 It ),

AIC = 1012.1, SBC = 1017.7.

THE FOURIER APPROXIMATION

with (t)= A0 + Ak sin

where s refers to the number of fUHTXHQFLHVFRQWDLQHGLQWKHSURFHVVJHQHUDWLQJ. t).20

y t = c 0 + [c k sin( 2kt / T ) + c k cos(2kt / T )]+ t .

IMPLICATIONS AND POLICY RECOMMENDATIONS

and define Fs(t) to be the sum of the Fourier coefficients:

Figure 1: Effects of the Interventions

Incidents per quarter

Figure 2: The F-ARMA and Intervention Models

Incidents per Quarter

A doubling of the spending to fortify and secure US

The rise of religious fundamentalist-based terrorism

Further increases in spending to secure US embassies by

US retaliatory raid against Libya on the morning of 15

AN ECONOMIC PERSPECTIVE ON TRANSNATIONAL TERRORISM

AN ECONOMIC PERSPECTIVE ON TRANSNATIONAL TERRORISM

A Look at the Data

Trends and Cycles

insufficient to make failure a certainty.

Game Theory and Governmental Responses

Other Kinds of Substitutions

Toward a Benefit-Cost Analysis of Terrorist-Thwarting Policies

unknown resolve of the terrorists.

Communist Organizations. London: Frank Cass.

Framework. Journal of Law and Economics. 30:1, pp. 1-21.

Terrorist Incidents. American Economic Review. 78:2, pp. 27-31.

Violence. 7:4, pp. 10-44.

Studies in Conflict and Terrorism. 15:1, pp. 1-11.

Evidence from Three Mediterranean Countries. unpublished manuscript.

Tourism: The Case of Spain. Terrorism. 14:1, pp. 49-58.

Vector-Autoregression-Intervention Analysis. American Political Science Review.

Era. International Studies Quarterly. 43:1, pp. 145-67.

Threatening. Journal of Conflict Resolution. 44:3, pp. 307-32.

Alternative Time Series Estimates. unpublished manuscript.

Retaliation in the Fight Against Terrorism: An Econometric Evaluation. Terrorism

the Impact of Terrorism on Tourism. KYKLOS. 45:4, pp. 531-54.

(ITERATE 5 update). Personal communication.

Terrorism and Political Violence. 9:2, pp. 1-15.

Activities: A Spectral Approach. KYKLOS. 40:2, pp. 238-55.

Political Hostage-Taking in Light of the Iran-Contra Affair. Southern Economic

Journal of Law and Economics. 21:1, pp. 1-31.

Question. American Economic Review. 78:2, pp. 16-20.

of Political Economy. 93:3, pp. 383-97.

American Economic Review. 78:2, pp. 22-6.

Terrorists. Terrorism and Political Violence. 13:2, pp. 85-106.

International Terrorism: Attributes of Terrorist Events, 1978-1987. (ITERATE 3).

International Terrorism: Attributes of Terrorist Events, 1988-1991. (ITERATE 4).

Conflict Resolution. 38:3, pp. 452-78.

Terrorists Choice of Targets. Synthese. 76:2, pp. 245-61.

where s refers to the number of fUHTXHQFLHVFRQWDLQHGLQWKHSURFHVVJHQHUDWLQJ.t).20