Why a small probability of terror generates a large macroeconomic impact

Ziv Naor

Defence and Peace Economics, 2015, vol. 26, issue 6, 583-599

Abstract: It has been shown that terror activities have had a substantial macroeconomic impact. This work presents a macroeconomic model showing quantitatively that an increase in the probability of terror-induced death such as that observed in Israel in 2001-2004 is consistent with the documented contraction of economic activity associated with the impact of terror. The model includes fear of terrorism, represented as a higher level of probability perception than the cumulative-prospect theory expects, and a local government that can supply the public with a security good. The effectiveness of the production of the security good plays an important role in determining the terror-induced loss of production to the economy.

Date: 2015
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DOI: 10.1080/10242694.2014.921358

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