Vulnerabilities to Terrorism

Is our nation safe from terrorist attacks? This paper examines the effectiveness of U.S. federal grants in reducing domestic vulnerability to terrorism since the 9/11 attacks. I derive a model for allocating federal funds to States based on targets within the State, the government budget, and three parameters specific to a target type the probability of attack, the expected damage upon attack, and the effectiveness of grant funds on mitigating risk. The damage mitigation function captures the effectiveness of grant funding toward reducing expected damage a feature that is ignored in the current policy environment. My comparison of the optimal allocations to the government formula by which $19 billion has been allocated exposes three distortions. Empirical results suggest that the government formula over-compensates for population-based vulnerabilities leaving unsystematic vulnerabilities exposed. Chemical plants, oil and gas pipelines and livestock facilities may be particularly at risk. JEL Codes: H56, P11, H77, H54, H61