Network Externalities and the Structure of Terror Networks

We analyze the optimal network structure of two types of terrorist organizations. In the centralized network, the leadership selects the level of individual effort and the level of group connectivity so as to maximize the expected net welfare of the organizations membership. Leaders in loosely-connected networks will also seek to balance the trade-off between security and communications. However, with decentralized decision making, the individual nodes may not make optimal decisions from the group’s perspective. As a consequence, the decentralized decision making process is suboptimal from the overall perspective of the network. In particular, the leadership in a centralized network is able to coordinate the activities of all network members and to take advantage of important network externalities.