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Untimely Death, The Value Of Certain Lifetime And Macroeconomic Dynamics

  • Ziv Naor
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    In the past few years, several studies have documented the fact that terrorism has a negative impact on economic activity. The present study attempts to provide an explanation that rests on two pillars. The first pillar expands on Eckstein and Tsiddon (2004) to account explicitly for a subjective assessment of the probability of death due to an act of terror; the second explicitly accounts for the dissatisfaction that derives from untimely death. In the first pillar, individuals estimate the risk of death by invoking the cumulative-prospect theory (Kahneman and Tversky, 1992). Since the probability of death in a terrorist attack is low, decision weights are higher than the actual probabilities. Needless to say, while cumulative-prospect theory governs individuals' behavior, the economy is governed by actual probabilities. The second pillar on which our explanation rests is the disutility that emerges from an individual's untimely and unnatural death. When calibrated, the integration of both explanations seems to show that terror has a rather strong impact on economic activity, one that may be observed in terror-affected regions.

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    Article provided by Taylor & Francis Journals in its journal Defence and Peace Economics.

    Volume (Year): 17 (2006)
    Issue (Month): 4 ()
    Pages: 343-359

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    Handle: RePEc:taf:defpea:v:17:y:2006:i:4:p:343-359
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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
    3. Eckstein, Zvi & Tsiddon, Daniel, 2004. "Macroeconomic Consequences of Terror: Theory and the Case of Israel," CEPR Discussion Papers 4427, C.E.P.R. Discussion Papers.
    4. Abadie, Alberto & Gardeazabal, Javier, 2001. "The Economic Costs of Conflict: A Case-Control Study for the Basque Country," Working Paper Series rwp01-048, Harvard University, John F. Kennedy School of Government.
    5. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
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