AN ECONOMIC PERSPECTIVE ON TRANSNATIONAL
TERRORISM
by
Todd Sandler
Robert R. and Katheryn A. Dockson Professor
of International Relations & Economics
School of International Relations
University of Southern California
and
Walter Enders
Lee Bidgood Chair of Economics & Finance
School of Business
University of Alabama
Economists’ Contribution to the Study of Transnational Terrorism
 Policy effectiveness of alternative responses (tightening
punishments, retaliatory raids, installing technological barriers)
 Negotiation responses in hostage incidents
 Analysis of terrorists’ choice of targets
 Economic impacts of terrorism
 Terrorism and the media
Definition of Terrorism: premeditated use, or threat of use, of
extranormal violence to obtain a political objective through
intimidation or fear directed at a large audience
 Presence of a political objective
 Brutality to capture headlines – escalation of brutality
 Vulnerable target group, not immediately involved with the
decision-making
 Alternative modes of attack and simulated randomness – cost
and strategic advantage
Transnational terrorism: when a terrorist incident in one country
involves victims, targets, institutions, governments, or citizens of
another country, terrorism assumes a transnational character
 Transnational externality
 Too much or too little deterrence with “deterrence races”
 Piecemeal policies may exacerbate inefficiencies if multiple
such externalities
 Examples – WTC and 9/11
Economic methodology is particularly well-suited to provide insights
over and beyond those of the political science approach.
 Political science: stresses definition, institutional factors, and
case studies in an inductive framework
 Economics
 Account for strategic interactions among opposing interests –
e.g., terrorists and authorities; alternative targets
 Use of microeconomic models
 Government & market failures analyzed
A Look at the Data
 Table 1
 Essential Facts
 On average, few annual deaths
 9/11 equal to combined deaths from 1988-2000
 Cyclical pattern
 Spectacular events
 Few on US soil – transference problem
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.
 Overdeterrence versus underdeterrence
 Underdeterrence – if attacks on foreigners lead to little
collateral damage
 Overdeterrence – if the main cost is imposed on host
country’s interests and can transfer the attack abroad
o Prisoners’ Dilemma “deterrence race”
o Targeting of US citizens and property abroad
Data Available
 ITERATE, RAND/St. Andrews, and State Department
 Events data – sources and pitfalls
 Figures 1, 2, 3
 Bombings are favorite mode – about half of attacks; tracks
overall series
 Cycle nature; nonlinear trends
 1990 downturns; heighten proportion of deadly events
 Changing motivation: leftist vs. religious extremists
20
19
19
19
19
19
19
19
19
19
19
19
00
98
96
95
93
91
89
88
86
84
82
81
79
77
75
74
72
70
300
19
19
19
19
19
19
Incidents per Quarter
Figure 1
All Incidents and Bombings
350
Bombings
All
250
200
150
100
50
0
20
19
19
19
19
19
19
19
19
19
19
19
19
00
98
96
95
93
91
89
88
86
84
82
81
79
77
30
75
74
72
70
35
19
19
19
19
19
Incidents per Quarter
Figure 2
Assassinations and Hostage Incidents
Assassinations
Hostage Incidents
25
20
15
10
5
0
Figure 3
00
20
98
19
95
19
92
19
89
19
87
19
84
19
81
19
78
19
76
19
73
19
70
80
70
60
50
40
30
20
10
0
19
Percent
Proportion of Incidents with Casualties
Trends and Cycles
 Fitting a polynomial for trends
 Table 2
 All series but threats and hoaxes characterized by a quadratic
hill-shaped function
 No linear trends
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
(Time)3
F–statb
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).
All Events
Cycles Attributed to:
 Demonstration and copycat
 Heightened public sensitivity causes other terrorists to strike
following a successful event – e.g., anthrax attack.
 Attack-counterattack process
 Each type of incident will have its own cyclical behavior;
longer cycles for logistically complex events.
 Economies of scale in planning/executing
 Public opinion cycle following a spate of attacks and
countermeasures
Use of Fourier Series to determine underlying cycles
 A low (high) frequency implies a long (short) cycle.
 Anticipate logistically complex events to have a low frequency
– i.e., long cycle
 Generally proves to be the case – proportion of the series’
variance accounted for by the lowest 15% of the frequencies –
Assassinations and casualties events have more of their variance
explained by the low frequencies.
Game Theory and Hostage Taking
 Pillar of US policy: “make no concessions to terrorists and
strike no deals”
 Policy hasn’t been adhered to
 Figure 4
 Gov’t goes first and determines D, which determines
likelihood of logistical failure, θ.
 D is an insurance policy – paid in all states of the world
 Terrorist goes second and decides whether or not to attack, Ω
 If hostages secured, then negotiation stage, p is likelihood of
gov’t capitulation
Figure 4
Game Theory for Hostage Event
Government chooses deterrence
D( q)
Terrorists decide whether or not to attack
D( q)
0
Government response
a + D( q)
-c
h + D(q)
m
n + D( q)
~
m
Conventional Wisdom never-to-capitulate
(i) Deterrence is sufficient to stop all attacks.
(ii) Gov’t’s pledge is fully credible to all would-be hostage takers.
(iii)The terrorists’ gains from hostage taking only derives from
fulfillment of their demands – no media benefits or fanaticism.
(iv) No uncertainty concerning payoffs – i.e., h and n known.
In practice
 Each of these assumptions may not hold.
 If government’s pledge is belied, p = 0, hostages will be taken if
m  0 from media or other benefits.
net benefit: (1-q) [ pm  (1- p)m] -qc
if p = 0, then (1- q)m  -cq
will lead to attacks
 If p > 0, owing to past concessions, attacks do become more
imminent.
 Fanatical m  -c  0 , hostage taken even if θ = 1 and deterrence
is insufficient to make failure a certainty.
 If h and n are known
 No capitulation if h > n
 Capitulation if n > h
 Reputation costs and other constitutional rules
Game Theory and Government Reponses
 Overdeterrence and underdeterrence
 Problem exacerbated by terrorist forming networks.
 Underdeterrence in countries sympathetic to grievance
 As number of targets increases, transference increases as a
problem
 Terrorists’ network limit the effectiveness of countries’
independent efforts to thwart terrorism as externalities
are maximized through countries’ uncoordinated
decisions.
 Terrorists’ seek out weakest link.
 Targeted nations must form networks to counter the
threat.
 Piecemeal policy – second-best outcomes
 Deterrence/transference race can be enhanced through
acquisition of information.
 Failure to coordinate retaliatory responses
Building a Coalition against Terrorism
 Coordinate retaliatory response
 Prisoners’ Dilemma or Assurance Game
 Interchange of 3’s and 4’s owing to atrocity of act, public
opinion; technological advantage to limit casualties
 Figure 5
Figure 5
Ordinal Game Matrix for Retaliation
UK
Retaliate
Do Nothing
Retaliate
4, 4
1, 3
Do Nothing
3, 1
2, 2
US
Rational-Choice Representation
 Terrorist maximizes utility subject to resource constraint
 Prices are per-unit prices of alternative modes of attack
 Policy changes these prices
 Substitution effects
 Complementarities
 Can’t examine one time series at a time
Choices
 Nonterrorist activities vs. terrorist activities
 Alternative attack modes; lethality of act; location; whom or
what to target
 Possible influence of metal detector – divert attack
Enders-Sandler (1993) VAR Model
 Metal detectors decreased skyjackings and threats, but increased
other kinds of hostage incidents, not protected by detectors.
 Fortification of US embassies and missions reduced attacks
against such institutions, but were tied to an increase in
assassinations of officials and military personnel outside of
protected compounds.
 Libyan retaliation led to an intertemporal substitution and no
lasting effect.
 Get-tough-with-terrorists laws had no discernible influence.
Effective Anti-Terrorism Policy
 Create a substitution into a less harmful effect
 Terrorists’ resource endowment targeted
 Simultaneously target a host of attack modes
 Make access to nonterrorist activities easier
 Anticipate dynamic adjustments
Other kinds of substitutions
 Tourism
 FDI
Toward a Benefit-Cost Analysis of Terrorist-Thwarting Policy
 Cost side easy
 Benefit side difficult
 Use of value of statistical life
 Adjust for substitutions