Military aid, direct intervention and counterterrorism

We analyze the choice often faced by countries of whether to directly intervene to counter an external terrorist threat or to subsidize a foreign government to do it. We present a model which analyzes this policy choice where two countries, home and foreign, face a terrorist threat based in the foreign country. The home country chooses how much to invest in defending itself and in reducing terrorist resources either indirectly by subsidizing the foreign country or by directly by intervening itself and risking destabilizing the foreign country. Using a calibrated model, we are able to show that direct intervention is only an equilibrium if foreign and home efforts are not good substitutes in the technology used to reduce the resources of the terrorist group. A higher relative military efficiency by the home country makes intervention more likely.