An Economic Model of Terrorism

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2004 21: 17Conflict Management and Peace ScienceS. Brock Blomberg, Gregory D. Hess and Akila Weerapana

An Economic Model of Terrorism

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Conflict Management and Peace Science, 21:17–28, 2004Copyright C© Peace Science Society (International)ISSN: 0738-8942 printDOI: 10.1080/07388940490433882

An Economic Model of Terrorism

S. BROCK BLOMBERG

Economics DepartmentClaremont McKenna CollegeClaremont, California, USA

GREGORY D. HESS

Economics DepartmentClaremont McKenna CollegeClaremont, California, USAandCESifoMunich, Germany

AKILA WEERAPANA

Economics DepartmentWellesley CollegeWellesley, Massachusetts, USA

We develop an economic model of terrorism. Groups undertake violent activities tochange the status quo when they are unable to bring about drastic political change inthe face of limited access to economic opportunity. Furthermore, these groups are morelikely to resort to terrorist activity when they face powerful policy-making elites whocan’t be uprooted easily, by legitimate means or otherwise. If, on the other hand, theelite groups currently in power are weak but can’t be removed from power legitimately,the dissident groups are likely to initiate rebellion activity, such as civil wars and coups,to take over the rule of the governing elite themselves. In particular, the model exhibitsmultiple equilibria. For example, one equilibrium can be sustained where groups withlimited access to opportunity may find it rational to engage in terrorist activities whilepolicy-maker elites may find it rational not to engage in opening access to these groups.The result is, then, a pattern of reduced economic activity and increased terrorism. Analternative equilibrium can be sustained where access is more abundant and terrorismis reduced.

Keywords growth, terrorism, political economy

JEL Codes H3, N4

The tragic events of September 11, 2001 and subsequent terrorist attacks in Bali, SaudiArabia, and most recently Istanbul, have led to heightened research interest in identifyingpossible factors that drive groups to undertake terrorist activity. Economic researchers whohad not previously been engaged have begun devoting more attention to the problem, and

Address correspondence to S. Brock Blomberg, Associate Professor, Claremont McKenna College, 500 E.9th Street, Bauer Center, Claremont, CA 91711, USA. E-mail: [email protected]

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18 S. B. Blomberg et al.

several economic policy groups have even developed conferences to learn more about theissue.1 While the results from this new wave of economic research have been intriguing,there is still much to learn about the link between resource allocation and terrorism. Thepurpose of this paper is to provide some theoretical insight on the topic.

In this paper, we present a model that describes how one factor—the state of theeconomy—can lead groups to resort to terrorist attacks.2 We wish to stress that our modelis only examining one possible explanation for terrorist activity. Other authors, such asEpstein and Gang (2002), Bernholz (2003), and Wintrobe (2002), have studied the importantinfluences of increased fundamentalism and group solidarity in driving terrorist activity.However, it is important to note that economic conditions are important to consider inidentifying the underlying determinants of conflicts and terrorist activity. The predictions ofthis model are consistent with the empirical evidence found in work by Blomberg, Hess, andOrphanides (2003), Blomberg, Hess, and Weerapana (2004), Blomberg, Hess, and Thacker(2002) and Hess and Orphanides (1995), all of which study the empirical relationshipbetween economic performance and various types of conflict, including external wars,internal civil wars, and terrorism.

We develop a theoretical model in which the decision by dissident groups to use terroristactivities is determined by economic shocks. This model draws on and extends the workof Tornell (1998) and Grossman (1991). Grossman (1991) presented a static model thatrelates insurrections and the suppression of insurrections to the technology of soldieringand rebellion, to the production technology, as well as to the amount of resources beingextracted by the rulers in the form of taxes. Tornell (1998) presented a dynamic model inwhich organized groups extract rents from the economy, eventually depleting the resourcesto a point where a group not in power decides to abandon this status quo in an attemptto consolidate their own power and deprive the other group(s) of the access to resources.Tornell’s model is used to analyze the question of why economic reforms come fromwithin: we adopt and extend his framework, combined with descriptions of the economy’ssoldiering and rebelling technologies in the spirit of Grossman (1991) to provide economicexplanations for an upsurge in terrorist activities in a country.

The intuition behind the results of our model is that the peaceful status quo will beeventually disrupted by disgruntled groups seeking to increase their voice, power, andcontrol. Slow growth of the resource base or greater extraction of the existing resource baseby those in power leads to increased marginalization of certain groups and increases theprobability of conflict. The severity of the resulting conflict depends on the soldiering andrebellion technology in the country. When the ruling group is militarily weak, the modelpredicts an upsurge in a stronger form of conflict, which we term a “rebellion attack,” inwhich a group seeking to disrupt the status quo overthrows the government and takes power.Somewhat more effective soldiering technology or somewhat weaker rebellion technologyleads the dissident groups to engage in a less intense attack, which we term a “terroristattack,” in which a dissident group seeks to undertake terrorist activities to increase theirvoice in the economy, yet are unable to take over power.

The basic prediction of the model is consistent with the findings in Blomberg, Hess, andWeerapana (2004): economies with good institutions and defense capabilities will be moreaffected by terrorism in bad times, whereas economies with weak institutions and defensecapabilities are more likely to see civil wars, coups, and other conflict types designed to

1For example, the DIW-Berlin conference on terrorism in June 2002 and the Carnegie-RochesterSeries issue on terrorism in November 2003.

2Our work here is in the spirit of Hirshleifer’s (1994) view of how economists model conflict.The formulation of the paper, however, is closer to Garfinkel (2004) even though our focus is moreof a “diversionary theory of terrorism” than is hers.

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An Economic Model of Terrorism 19

overthrow the government in bad times. These links among war, politics, and the economyhave been documented by a number of authors, including Hess and Orphanides (1995,2000a) who estimate that the probability of conflict for the U.S. doubles when the economyhas recently been in a recession and the president is running for reelection. Blomberg, Hess,and Thacker (2002) and Blomberg and Hess (2002) found some evidence for a relationshipbetween the state of the economy and internal and external conflicts once the region andinitial conditions are taken into account. Other evidence on linkages among the incidenceof war, politics, and the business cycle include O’Brien (1996), DeRouen (1995), and Gelpi(1997). Such empirical evidence strengthens our claim that the model presented in thispaper provides one important explanation for the incidence of terrorist activity.

The Model

The basic structure of the model is as follows: There are two organized groups in theeconomy: a government and dissidents.3 Both groups appropriate the stock of resources inthe economy at , which has a raw growth rate of β. The government appropriates resourcesat a rate γ , whereas the dissident group extracts resources from the economy at a lesser rateδ, i.e., δ < γ . The evolution of assets in the economy is described by the equation

at = βat − γ at − δat .

The dissident group has three options. First, it can choose to attack the government andseek to overthrow it. If it is successful in this endeavor, then the dissident group gets a shareof the productive resource base in the economy and also gets to restructure the economyand set the new rules for the economy. To be more specific, at time τ , the dissident groupcan mount a “rebellion attack” that lasts h periods, expending a fraction q R ∈ (0, 1) of itsappropriation in the process. If it succeeds, with probability θ , it takes over the role of thegovernment and gets to extract a larger fraction of resources, γ instead of δ. 4 It also getsfuture control over setting the rules in the new economy: we will denote the present valueof income gained by setting these new rules by the term W .

The second option for the dissident group is to mount a low-intensity attack on thegovernment in the form of a terrorist attack. These are not as intense as an overthrowing of thegovernment but are instead designed to signal unhappiness with the status quo and to increasetheir control over the economy. To be more specific, at time τ , the dissident group can mounta “terrorist attack” that lasts h periods, expending a fraction qT ∈ (0, 1) of its appropriationin the process, where qT < q R . For concreteness, we define qT = (1−α)(q R), where0 < α < 1. The parameter α is a key parameter in our model. It captures the effciency ofthe dissidents’ technology. The easier it is for terrorists to engage in terrorist acts versus war,the more likely the coefficient approaches its limit,α→1. Finally, we assume that if the attacksucceeds, with probability θ , the terrorist group does not get more control of the fiscal assetsin the economy, but it does get more agenda-setting power over the rules of the economy.5

Denote αW to be the present value of income gained by partially setting these new rules.

3Just as Tornell (1998) categorized potentially heterogenous subgroups under the broad rubric of“unions” or “corporations,” the rubric of “dissidents” can cover many groups with different objectivesand ideologies.

4It is likely that θ depends positively on q. We can certainly amend the model to take this intoaccount. However, it would only make our results stronger.

5We are assuming that the probability of success in a terrorist attack is the same as the probabilityof success in overthrowing the government. This may seem unreasonable at first glance, but keep inmind that the resources that need to be expended for a given probability of a successful overthroware set to be substantially greater than the resources that need to be expended for similar success at aterrorist attack.



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Notice that α links the institutional terrorist technology to the payoff in addition to itsrole in the appropriation process. In this way, when α→1, the net benefits for terrorismrelative to war rise and the resources needed to engage in terrorism relative to rebellion fall.This would lead to more terrorism-related incidents taking place. For example, the value ofα would depend on some soldiering and rebellion technology factors that are taken to beexogenous in the model.

The final option for the dissident group is, of course, to maintain the status quo. Theywill only choose to maintain the status quo if the cost of mounting either a terrorist attackor a rebellion attack is too high relative to the reward of doing so.6

We can now compare the payoff functions under the three options. If we assume asubjective rate of time preference, ρ, the payoff to the dissident group from maintaining thestatus quo S(τ ) is

S(τ ) =∫ τ

oδa0e(β−γ−δ)se−ρsds +

∫ τ+h

τ

δa0e(β−γ−δ)se−ρsds

+∫ ∞

τ+hδa0e(β−γ−δ)se−ρsds. (1)

Equation (1) divides the payoff into three main time periods: the past periods before consid-ering attack, 0 to τ ; the possible insurrection period, τ to τ + h; and the remaining periods,t + h to ∞. As S(τ ) is the status quo, the values in the integrals are the same in each period,so that S(τ ) = ∫ ∞

0 δa0e(β−γ−δ)se−ρsds.We next turn our attention to the payoff for the rebellion option. The payoff to the

dissident group from launching an attack suffcient to overthrow the status quo differs fromthe above because of two factors: the cost the group has to pay during the τ to h period oflong insurrection and the benefits that it gets if the insurrection is successful, consisting ofgreater extraction of the asset stock and the ability to set the new rules for the economy. Forsimplicity, we assume that an unsuccessful insurrection does not result in any governmentalretribution. In other words, after an unsuccessful insurrection, the dissident group receivesthe status quo extraction from periods τ + h to ∞.7 The payoff to launching a rebellionR(τ ) is then

R(τ ) =∫ τ

0δa0e(β−γ−δ)se−ρsds +

∫ τ+h

τ

δa0e(β−γ−δ)se−ρs(1 − q R)ds

+ (1 − θ )∫ ∞

τ+hδa0e(β−γ−δ)se−ρsds + θ

∫ ∞

τ+hγ a0e(β−γ−δ)se−ρsds

+ θW e−ρ(τ+h). (2)

While the first terms in equations (1) and (2) are the same, the remaining terms show thedifferences described in the preceding paragraph. Notice that as the probability of successapproaches zero without expending any cost q R , (2) reduces to (1). In other words, if thereis no chance of winning, the payoff to the resurrection is equivalent to the payoff from thestatus quo.

6Note that the government, while not being modelled explicitly, is not completely passive. Therate at which it chooses to extract resources γ , the policies that it chooses to affect the growth ofthe economy, and the resources that it devotes to soldiering all affect the resources that the dissidentgroup has to expend in order to mount a successful attack.

7This could be amended without any loss of generality. However, to keep things simple, wechoose not to include such an extension.



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Finally, we describe the payoff to the dissident group from launching a terrorist attack,i.e., an attack that is not of suffcient scale to overthrow the status quo but large enough topotentially increase the dissident group’s agenda-setting power. The primary difference inthe terrorist case versus the rebellion case is that it costs less, qT < q R , and the extractionrate over the period from τ + h to τ + ∞ remains at δ instead of γ , with the grouponly receiving partial benefit from changing the rules of the economy αW . The payoff oflaunching a terrorist attack, T (τ ), can be expressed as

T (τ ) =∫ τ

0δa0e(β−γ−δ)se−ρsds +

∫ τ+h

τ

δa0e(β−γ−δ)se−ρs(1 − qT )ds

+∫ ∞

τ+hδa0e(β−γ−δ)se−ρsds + θαW e−ρ(τ+h). (3)

Comparing the Payoff Functions

In this subsection, we combine the payoff functions (1), (2), and (3) to see which choiceis preferred by the dissident group. To aid in the analysis, we illustrate these payoffs withfigures to show how these payoffs are determined by the economy. As before, we start witha description of the status quo function, which is simplified as

S(τ ) =∫ ∞

0δa0e(β−γ−δ−ρ)sds.

As S(τ ) is independent of the time of initiation of conflict, we can represent its payoff by ahorizontal line. This is shown in Figure 1a. In this case, the payoff is constant over time.

Next, we examine the rebellion payoff depicted by the R curve. Figure 1b plots thispayoff over time. A graphical representation of our R curve is either decreasing throughoutor increasing for a while and then decreasing, i.e., concave. We depict the more interestingcase in which it is increasing and then decreasing. The concave shape given in Figure 1boccurs because delaying the instigation of a rebellion can on the one hand increase yourpayoff by postponing the fraction of resources q R that need to be expended to pull off therebellion, but on the other hand decrease your payoff by postponing the added potentialgain from a successful rebellion. This latter effect comes from the payoff W from settingnew rules as well as being able to extract γ instead of δ.

Finally, we depict the T curve in Figure 1c. The shape is similar to Figure 1b foranalogous reasons. Similar intuition tells us that on the one hand delaying the instigation ofa terrorist attack increases the payoff by postponing the fraction of resources qT that needto be expended to pull off the rebellion, but on the other hand it also decreases the payoffby postponing the added potential gain of greater control over the rules of the economy,i.e., the payoff αW .

Now that we have described each separately, we compare them directly so that we canexamine the conditions that lead to rebellion and terrorism over status quo responses. Forexpositional purposes, we begin by comparing T and S and then R and S. Finally, we Rand T . In other words, we examine the conditions under which some attack is warranted.After that, we examine which sort of attack is warranted, R or T .

Mathematically, the difference between the payoff from terrorism and the status quo isgiven by

T (τ ) − S(τ ) = −qT∫ τ+h

τ

δa0e(β−γ−δ)se−ρsds + θW e−ρ(τ+h). (4)



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(a) (b)

(c)

FIGURE 1 Payoffs to a dissident group of (a) maintaining status quo, (b) rebellion,(c) terrorism.

Notice that the status quo differs from the terrorist outcome in two significant ways: first,a terrorist attack carries a cost of qT of foregone extraction during the attack period, andsecond, the terrorist attack, if successful, allows the group a greater ability to change therules of the economy. The sign of (4) is therefore ambiguous.

Following the exact same logic, we can show that the difference between the payofffrom rebellion and the status quo is given by

R(τ ) − S(τ ) = −q R∫ τ+h

τ


+θ

∫ ∞

τ+h(γ − δ)a0e(β−γ−δ)se−ρsds + θW e−ρ(τ+h). (5)



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From this equation, we see that the payoff between R and S leads to an equation that cannotbe arbitrarily signed either, indicating that at a given point in time, there is no reason forrebellion to be preferred to the status quo.

To illustrate this point, we provide a graphical depiction of the comparison payoffs inFigures 2a and 2b. Both figures show an economy in which a rebellion or a terrorist attackhas not taken place, although we assume that initially the status quo yields a more favorableoutcome than either a rebellion or a terrorist attack. Since the benefit from either attack(W ) is fixed, while the costs (a portion of the extraction from a dwindling stock of assets)

(a)

(b)

FIGURE 2 Payoff when (a) rebellion is preferred to terrorism, (b) terrorism is preferredto rebellion.



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are decreasing over time, the payoff from attack will become higher than the payoff frompursuing the status quo at some point in the (perhaps distant) future. This is the intuitionfor why the payoff functions R(·) and T (·) are concave.

Finally, to compare the relationship between the T graph and the R graph in Figures 2aand 2b, we examine the difference between the payoff from launching a rebellion and thepayoff from terrorism:

R(τ ) − T (τ ) = (qT − q R)∫ τ+h

τ


+θ

∫ ∞

τ+h(γ − δ)a0e(β−γ−δ)se−ρsds + (1 − α)θW e−ρ(τ+h). (6)

The rewards from successful rebellion are greater than the rewards from successful terrorismso in general we would expect that the payoff to rebellion will exceed the payoff to terrorism,as depicted in Figure 2a. However, the resources expended for terrorism are less than theresources expended for rebellion, (qT − q R) < 0, which allow for the possibility that thepayoff from terrorism may initially be higher than the payoff to rebellion: this is illustratedin Figure 2b. Hence, when there is some sort of attack, terrorism is preferred over rebelliononly when payoffs for rebellions are smaller and costs for rebellions are greater.8

While we have concentrated our discussion on cases in which some type of insurrectionis inevitable, there are obvious cases under which the status quo may be preferred, since thecost of any type of insurrection may be prohibitive, resulting in the payoff from the statusquo being higher than either option. This will occur when qT or q R is prohibitively large,or when the growth rates are satisfactory, as illustrated in Figure 3a.

We have therefore demonstrated all of the possibilities: attack preferred to status quo(Figures 2a, 2b); rebellion preferred to terrorism (Figure 2a) and vice versa (Figure 2b);and finally, status quo preferred to attack (Figure 3a). In what follows, we would like toexamine the factors that make each of these choices more likely to occur.

The purpose of the comparative static experiment is to determine the conditions underwhich attack is preferred to the status quo. We have identified several parameters (e.g.,β, γ , δ) as candidates to vary for the experiment. Even though these costs to insurrectionare exogenous to the model, they should be related to economic factors that influence thedecision to attack. For example, an ever increasing pie, or an ever increasing slice from thepie, would increase the cost to attack. In other words, we would expect the cost to be highergiven higher economic growth (high β), lower extraction by the government (low γ ) andhigher extraction by the dissidents (high δ). To formalize this, we consider Proposition 1.

Proposition 1. Lower economic growth (low β) and higher shares to the government(high γ ) increase the likelihood of a rebellion or terrorist attack.

To understand the mechanics of this proposition, consider (4). It is straightforward from thesimple partials that ∂(T −S)

∂β< 0 and ∂(T −S)

∂γ> 0. The analogous equation for the rebellion

payoff is R(τ )− S(τ ) = −q R∫ τ+hτ

δa0e(β−γ−δ)se−ρsds+ θ∫ ∞τ+h(γ − δ)a0e(β−γ−δ)se−ρsdsθ

W e−ρ(τ+h). If the two parties are extracting resources at a rate that exceeds the raw growthrate β, then it follows that ∂(R−S)

∂β< 0 �

Notice that it is only under very stringent conditions that conflict will never occur.In general, as the resources in the economy dwindle, conflict becomes a more attractive

8This gap becomes more negative the larger α is i.e., the larger the relative share of resourcesgained from terrorism, and the lower the relative cost of engaging in a terrorist attack.



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(a)

(b)

FIGURE 3 (a) Reducing conflict: higher growth, lower taxes, greedy dissidents increasepayoff of status quo; (b) increasing the payoff from terrorism: more effective soldiering andbetter institutions discourage rebellion.

option for the dissident groups. Since the resources of the economy depend on how hightax rates are, and on how low the extraction rates are, we would expect that economies withlow growth rates, high government tax rates, and higher political unrest (disgruntlement ofdissident groups with their extraction rate) would have higher incidences of conflict. So,during poor economic times (low β), and when the relative share of the pie is smaller (lowδ, high γ ), dissidents will attack by some means.



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To investigate which mode of conflict will be chosen, we consider the equilibrium mostinteresting for our paper: the equilibrium associated with Figure 3b. In this case, attack is firstchosen over the status quo and then terrorism is chosen over rebellion. The payoff to usingterrorism as a mode of conflict instead of rebellion will be higher when the cost differentialin initiating rebellion (qT − q R) is high. Intuitively, one would expect that the differencebetween the resources needed to initiate a rebellion and the resources needed to initiate aterrorist attack depend on the institutional processes of the economy (which can include avariety of factors, including GDP per capita, income distribution, military spending, ethnicdivisions, etc.). We can specify these costs as working through α. Furthermore, the benefitsto using terrorism as opposed to rebellion also depend positively on α, which is the degreeto which the dissident group can set the agenda using terrorist attacks.9 More formally,consider the following proposition.

Proposition 2. Institutional processes that favor terrorist activities (high α) increase theprobability of a terrorist attack over a rebellion.

To understand the analytics of this proposition, we repeat the analogous experiment fromProposition 1. Namely, from (7), it follows that ∂(R−T )

∂α< 0. �

So what do Propositions 1 and 2 imply? Conflict is likely to occur when the economy isfailing (e.g., β falls) and when dissident groups receive smaller portions of the pie. However,the key to whether the group chooses to rebel or commit a terrorist act depends cruciallyon their access to the government α. When groups have fewer channels to construct anorganized uprising (high α), they must resort to terrorist acts during poor economic times.However, if they can organize, it might be more beneficial for them to initiate a civil war.This would be in line with the empirical results in Blomberg and Hess (2002) that showa strong correlation between adverse economic outcomes and the prevalence of civil war.However, the present paper is more concerned with the conditions under which terrorismwill be chosen over war.

In summary, we have constructed a simple model that predicts that conflicts are morelikely in bad times: when the resource base of the economy shrinks, dissident groups are lesslikely to be satisfied with claiming their low share of the smaller pie and are likely to instigatesome type of conflict to increase their share of the pie. Furthermore, the model predicts thatchoice between a rebellion, in which the dissidents overthrow the government, and a terroristattack, in which the dissidents seek to improve their voice in the economy, depend heavilyon the degree to which the government is responsive to the terrorists’ demands and, mostimportantly, on the soldiering technology of the economy: richer countries that have betterinstitutions, stronger economies, and well-equipped armies raise the cost of rebellion to thepoint that dissident groups prefer to resort to terrorism.

Comparing the Predictions to the Evidence

The model is not empirically tested here. However, the predictions of the model are con-sistent with prior empirical work on the relationship between the state of the economyand conflict by Blomberg, Hess, and Orphanides (2003), Blomberg, Hess, and Weerapana(2003), Blomberg, Hess, and Thacker (2002), and Blomberg and Hess (2002), among others.

Blomberg, Hess, and Orphanides (2003) merged the ITERATE data set from Mickoluset al. (1995) with the Penn World Table dataset and datasets of external and internal conflict.

9Other factors that may influence α such as the government’s willingness to accede to terroristdemand, the degree of sympathy from inside the government, etc., can influence the terrorists’ abilityto change the rules of the economy to their liking.



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They explored these data with cross-sectional and panel growth regression analysis and astructural VAR model. The investigation suggests important differences regarding both theincidence and the economic consequences of terrorism among different sets of countries. InOrganisation for Economic Co-operation and Development (OECD) economies, in particu-lar, terrorist incidents are considerably more frequent than in other nations, but the negativeinfluence of these incidents on growth is smaller.

Blomberg, Hess, and Weerapana (2003) used the ITERATE data set from Mickoluset al. (1995) and macroeconomic data from the Summers and Heston (1991) dataset toexamine the relationship between terrorist incidents and the state of the economy. Thestate of the economy is captured by a two-state Markov process (economic contraction orexpansion), and another two-state Markov process describes the state of terrorism (terrorism-related violence or peaceful status quo). In order to capture the different impacts basedon institutional structure, the authors split the sample according to income, strength ofdemocracy, and also between sub-Saharan Africa and the rest of the world. The empiricalresults suggest that periods free from terrorist events occur less frequently for high-incomeand democratic countries. Furthermore, within those countries, the likelihood of a terroristevent is inversely related to the strength of the business cycle for democratic and high-income countries.

Blomberg, Hess, and Weerapana (2003) focused only on terrorist attacks. However,work by Blomberg, Hess, and Thacker (2002) and Blomberg and Hess (2002) provide moredetailed evidence of the link between different types of “rebellion” conflicts, such as externalconflict (e.g., wars) and internal conflict (e.g., coups), and the state of the economy. They donot find a systematic relationship across all countries and time, but they find a conditionalconflict–growth relationship that can only be identified once the region and initial conditionsare taken into account—a story that is consistent with the model described in this paper.

Conclusion

In this paper, we develop a model in which terrorist events are endogenously determined.Our main theoretical result is that an equilibrium can be sustained where groups with limitedaccess to opportunity may find it rational to engage in conflict while policy-maker elitesmay find it rational not to engage in opening access to these groups. In this case, becausethe insurgents continue to receive less of the pie, it is to their advantage to rebel either bycivil war or by terrorism.

The model is further able to predict which type of conflict will be chosen by theinsurgents. Terrorist attacks are more likely in countries with strong institutions and strongsoldiering during bad economic times or under exploitative leaders. Similarly, rebellionattacks are more likely in countries with weak institutions and weak soldiering during badeconomic times. In other words, if there are institutions or technologies in place that favorterrorism versus civil war or vice versa, then one type of conflict will be chosen over theother. So, for example, in more affuent countries with stronger defense capabilities, it wouldbe more challenging to mount a coup, making terrorism a more attractive option.

In short, our model predicts a pattern of higher conflict in countries with reduced eco-nomic activity, with terrorism more likely in more powerful, affuent countries. While we donot formally test the model, the results support a new wave of empirical research. The pre-dictions of this model are broadly consistent with the empirical evidence found in Blomberg,Hess, and Orphanides (2003), Blomberg, Hess, and Weerapana (2003), Blomberg, Hess,and Thacker (2002), and Hess and Orphanides (1995). However, as this wave of research isonly in its infancy, much work remains to be done in demonstrating the important channelsto terrorism.



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An Economic Model of Terrorism