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ON RATIONAL CHOICE THEORY AND THESTUDY OF TERRORISMCharles H. Anderton a & John R. Carter aa Department of Economics, College of the Holy Cross , 1 CollegeStreet, Worcester, MA 01610, USAPublished online: 21 Aug 2006.
To cite this article: Charles H. Anderton & John R. Carter (2005) ON RATIONAL CHOICETHEORY AND THE STUDY OF TERRORISM, Defence and Peace Economics, 16:4, 275-282, DOI:10.1080/1024269052000344864
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Defence and Peace Economics, 2005,Vol. 16(4), August, pp. 275282
ISSN 1024-2694 print/ISSN 1476-8267 online 2005 Taylor & Francis Group LtdDOI: 10.1080/1024269052000344864
ON RATIONAL CHOICE THEORY AND THE STUDY OF TERRORISM
CHARLES H. ANDERTON and JOHN R. CARTER
Department of Economics, College of the Holy Cross, 1 College Street, Worcester, MA 01610 USA
Taylor and Francis LtdGDPE108530.sgm (Received in final form 6 February 2005)
10.1080/13691450500085471Defence and Peace Economics1024-2694 (print)/1476-8267 (online)Original Article2005Taylor & Francis Group Ltd1600000002005CharlesAndertonDepartment of EconomicsCollege of the Holy Cross1 College StreetWorcesterMA 01610USAcanderto.@holycross.eduWhen rational choice theory is applied to the study of terrorism, it is important that attention be given to the derivedprinciples of constrained utility maximization. Particularly useful is the Slutsky equation, which rigorously analyzesthe quantity response in one activity to a price change in another. By directing attention to assumptions and/or infor-mation about compensated cross price elasticities, expenditure shares, and income elasticities, the Slutsky equationcan provide critical guidance in both theoretical and empirical analysis.
Keywords: Terrorism; Rational choice; Deterrence; Income and substitution effects; Slutsky equation; Composite good
The theme of this paper is that rational choice theory, when rigorously applied, can help clarifyand discipline the study of terrorism. Much of what follows is a review, or perhaps better, areminder of principles generated by the basic model of utility maximization subject to a budgetconstraint. We assume a modest degree of familiarity with the model. Textbook presentationsof the model are legion; particularly useful for this paper are Henderson and Quandt (1980)and Silberberg (1990).
We take as our starting point the interesting article by Frey and Luechinger (2003), whocontrast the potential benefits of benevolence versus deterrence strategies to dissuadeterrorists from violent activities. A deterrence strategy raises the opportunity cost of terroristactivities by defending potential targets, hitting terrorist training centers, infiltrating terroristgroups, and so on. Deterrence strategy is fundamentally confrontational and thus zero-sum. Abenevolence strategy also raises the opportunity cost of terrorist violence, but it does so byreducing the cost of non-violent activity, or what Frey and Luechinger call ordinary activity.Unlike a deterrence strategy, however, a benevolence strategy can improve the well-being ofterrorists (if they have more ordinary goods) and the public (if less terrorism occurs). In thisway, a benevolence strategy has the potential to achieve a positive-sum outcome.1
Corresponding author. E-mail: firstname.lastname@example.org For the purpose of this paper, we follow Frey and Luechinger (2003) in using the term deterrence to refer to
actions that directly raise the cost and hence price of terrorist activity. This contrasts with Schelling (1966), who usesdeterrence to refer to threats of retaliatory action that alter preferences.
276 C. H. ANDERTON AND J. R. CARTER
We begin by reviewing Frey and Luechingers (2003) model of benevolence strategy andtheir claim that a reduction in the costs of all other activities reduces the amount ofterrorism (Frey and Luechinger, 2003: 241). We show that the claim does not follow gener-ally from the rational choice model. Rather, the statement relies implicitly on assumptionsabout particular underlying demand elasticities and budget shares. Especially helpful to theanalysis is the well-known but perhaps underutilized Slutsky equation of the rational choicemodel.
DETERRENCE VERSUS BENEVOLENCE APPROACHES TO TERRORISM
In Frey and Luechingers (2003) geometric model, terrorists choose between terrorism andall other activities. Following standard practice, we assume that other activities refer to thecomposite good Y, defined as the expenditures on all other goods valued at their base prices.Assuming n goods with terrorism T = X1, then where
represent the initial prices of the n1 ordinary activities X2, , Xn. According tothe composite good theorem due to Hicks (1946), as long as the prices of the component goodschange by the same factor of proportionality t, then comparative-static analysis can becompleted as if choice is over two commodities T and Y. Define the price of the compositegood to be PY = t, where at base prices = 1. Then Y and tY can be interpreted respectivelyas real and nominal expenditures on all other goods.
Following Frey and Luechinger (2003: 242), Figure 1 compares and contrasts deterrenceand benevolence policies to reduce terrorism. Terrorist activity T is measured on the hori-zontal axis and the composite good Y on the vertical axis. Assume that the initial budgetconstraint available to the terrorists is aa. According to Figure 1, the terrorists consume T1in terrorist activity and Y1 of the composite good. A deterrence policy raises expected costsof terrorist activity and hence increases the price of terrorism PT. This causes the terroristbudget constraint to rotate along the T axis to budget line ab. The steeper budget linereflects the higher opportunity cost of terrorism. In accordance with the law of demand,terrorist activity is reduced to some lower level T2 along budget line ab. Hence, thedeterrence policy reflected in Figure 1 can be expected to reduce terrorist activity for givenpreferences.FIGURE 1 Deterrence and benevolence strategies to reduce terrorism.A benevolence policy also raises the opportunity cost of terrorism, but it does so by increas-ing terrorist access to the composite good by lowering the price of the composite good PY. Thisis shown in Figure 1 by budget line ca. The steeper budget line reflects the higher opportunitycost of terrorism. According to Frey and Luechinger (2003: 241), terrorists choose a level ofterrorism less than T1, which for convenience is drawn here equal to T2, the same level as underdeterrence policy. Based on this analysis, Frey and Luechinger (2003: 241) conclude thatbenevolence policy reduces terrorism:
Higher opportunity costs reduce the willingness of a potential terrorist to commit terrorist activities. An increasein the opportunity costs or, equivalently, a reduction in the costs of all other activities, therefore reduces theamount of terrorism.
Careful consideration of the rational choice model used in Figure 1 shows that Frey andLuechingers claim about the terrorism-thwarting effect of benevolence is not general. InFigure 1, the decrease in the price of other goods reduces terrorism from T1 to T2. However,
Y P X P X P Xn n= + + +20 2 30 3 0L ,P Pn2
0 0, ,L
RATIONAL CHOICE THEORY AND TERRORISM 277
an alternative outcome is consistent with the rational choice framewo