The Welfare Effects of Terrorism on International Tourism: A Structural Gravity Analysis

This paper examines the effects of terrorism on international tourism using a structural gravity model estimated for 48 countries over the period 2008–2020. The specification accounts for all major sources of bias identified in the gravity literature, including the treatment of domestic tourism flows. We find that terrorist incidents significantly reduce international tourism relative to domestic tourism, with effects that persist over time. The negative impact is driven primarily by attacks targeting institutional entities, whereas attacks against other targets do not significantly alter the relative behaviour of international and domestic tourists. We then exploit the structural nature of the gravity model to conduct counterfactual and welfare analysis. Counterfactual simulations indicate that reducing terrorism generates substantial increases in international tourism, particularly in countries with high levels of terrorist activity. Extending the analysis to a structural general-equilibrium framework, we show that eliminating terrorism produces positive welfare gains for all countries, although their magnitude varies considerably across destinations. While welfare levels depend on the assumed elasticity of substitution, the qualitative conclusions remain robust across alternative parameter values. Overall, the results highlight the importance of institutional security policies not only for restoring international tourism demand but also for improving economic welfare.