Sanctions, Financial Frictions, and the Organization of Conflict

Nicola Limodio and Lucas Mariani

No 21639, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies whether financial sanctions increase the financial frictions faced by terrorist groups and how these affect their organization. We exploit staggered sanctions on Pakistani terrorist leaders, linked to unique administrative data matching leaders' identities to charity board composition. After sanctions, associates of sanctioned terrorist leaders create more charities, exposed charities raise more funds, and affected groups splinter into factions. This reallocates terror: attacks increase in Pakistan but decline in the US and Western Europe. A multi-agent LLM analyzes qualitative evidence and yields friction intervals with a midpoint near 20 percent, comparable to a wealth tax on terrorist organizations.

Keywords: Sanctions; Terrorism; Finance (search for similar items in EconPapers)
JEL-codes: F51 F52 G30 H56 (search for similar items in EconPapers)
Date: 2026-06
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