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Untimely Death, The Value Of Certain Lifetime And Macroeconomic Dynamics

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  • Ziv Naor

Abstract

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.

Suggested Citation

  • Ziv Naor, 2006. "Untimely Death, The Value Of Certain Lifetime And Macroeconomic Dynamics," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(4), pages 343-359.
  • Handle: RePEc:taf:defpea:v:17:y:2006:i:4:p:343-359 DOI: 10.1080/10242690600688407
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    References listed on IDEAS

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    1. Eckstein, Zvi & Tsiddon, Daniel, 2004. "Macroeconomic consequences of terror: theory and the case of Israel," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 971-1002, July.
    2. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, pages 307-319.
    3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    4. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, pages 342-362.
    5. Alberto Abadie & Javier Gardeazabal, 2001. "The Economic Costs of Conflict: A Case-Control Study for the Basque Country," NBER Working Papers 8478, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Thomas Gries & Tim Krieger & Daniel Meierrieks, 2011. "Causal Linkages Between Domestic Terrorism and Economic Growth," Defence and Peace Economics, Taylor & Francis Journals, pages 493-508.
    2. Friedrich Schneider & Tilman Brück & Daniel Meierrieks, 2010. "The Economics of Terrorism and Counter-Terrorism: A Survey (Part I)," Discussion Papers of DIW Berlin 1049, DIW Berlin, German Institute for Economic Research.
    3. Shahbaz, Muhammad & Shabbir, Muhammad Shahbaz & Malik, Muhammad Nasir & Wolters, Mark Edward, 2013. "An analysis of a causal relationship between economic growth and terrorism in Pakistan," Economic Modelling, Elsevier, vol. 35(C), pages 21-29.
    4. Muhammad, Shahbaz & Muhammad, Nasir Malik & Muhammad, Shahbaz Shabbir, 2011. "Does economic growth cause terrorism in Pakistan?," MPRA Paper 35101, University Library of Munich, Germany, revised 30 Nov 2011.

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