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Why a small probability of terror generates a large macroeconomic impact

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  • Ziv Naor

Abstract

It has been shown that terror activities have had a substantial macroeconomic impact. This work presents a macroeconomic model showing quantitatively that an increase in the probability of terror-induced death such as that observed in Israel in 2001-2004 is consistent with the documented contraction of economic activity associated with the impact of terror. The model includes fear of terrorism, represented as a higher level of probability perception than the cumulative-prospect theory expects, and a local government that can supply the public with a security good. The effectiveness of the production of the security good plays an important role in determining the terror-induced loss of production to the economy.

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  • Ziv Naor, 2015. "Why a small probability of terror generates a large macroeconomic impact," Defence and Peace Economics, Taylor & Francis Journals, vol. 26(6), pages 583-599, December.
    • Handle: RePEc:taf:defpea:v:26:y:2015:i:6:p:583-599
    DOI: 10.1080/10242694.2014.921358
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    Cited by:

    1. Singhal, Saurabh & Nilakantan, Rahul, 2016. "The economic effects of a counterinsurgency policy in India: A synthetic control analysis," European Journal of Political Economy, Elsevier, vol. 45(C), pages 1-17.

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