An Economic Model of Terrorism

Abstract

We develop an economic model of terrorism. Groups undertake violent activities to change the status quo when they are unable to bring about drastic political change in the face of limited access to economic opportunity. Furthermore, these groups are more likely to resort to terrorist activity when they face powerful policy-making elites who can't be uprooted easily, by legitimate means or otherwise. If, on the other hand, the elite groups currently in power are weak but can't be removed from power legitimately, the dissident groups are likely to initiate rebellion activity, such as civil wars and coups, to take over the rule of the governing elite themselves. In particular, the model exhibits multiple equilibria. For example, one equilibrium can be sustained where groups with limited access to opportunity may find it rational to engage in terrorist activities while policy-maker elites may find it rational not to engage in opening access to these groups. The result is, then, a pattern of reduced economic activity and increased terrorism. An alternative equilibrium can be sustained where access is more abundant and terrorism is reduced.