Transnational Terrorism: An Economic Analysis by

Both theoretical and empirical techniques are used to put modern-day terrorism into perspective. This paper surveys past contributions, presents updated empirical findings, and suggests new directions for research. Because of strategic interactions among terrorists and targeted government, game theory and economic methods play an important role in identifying novel policy recommendations and behavioral insights. Transnational terrorism and efforts to curtail it involves externalities and market failures. The paper analyzes how terrorists alter tactics in reaction to government policies and how a no-negotiation hostage policy is difficult to institute. JEL classifications: D74, H56 Acknowledgement: This paper is an extended, updated, and modified version of “An Economic Perspective on Transnational Terrorism,” which appeared in the European Journal of Political Economy, 20(2), 2004, pp. 301-316. Portions of this article are being republished with the kind permission of Elsevier B.V. Todd Sandler is the Robert R. and Katheryn A. Dockson Professor of International Relations and Economics at the University of Southern California. Walter Enders is the Bidgood Chair of Economics and Finance at the University of Alabama. The Center for International Studies (CIS) at the University of Southern California supported the updating of the terrorism data for 2003.