The Microeconomics of Terrorism - Essay Example

According to Enders and Sandler (2002), terrorism is the premeditated use, or threat of use of extra-normal violence or brutality by sub-national groups to obtain a political, religious, or ideological objective through intimidation of a huge audience, usually not directly involved in the policymaking that the terrorists seek to influence. Although much emphasis has been laid on the studies of transnational terrorism, historical and contemporary evidence has shown that domestic terrorism is more prevalent. Within the modern day, terrorism is mostly being used as a political tool through which terrorists can effect political change. History shows that as a society becomes more democratic, rates of terrorism tend to be on the rise. This, without a doubt, places domestic terrorism on an important position as transnational terrorism. There are four common elements that characterize terrorism from several definitions. These elements include the informal nature of the individuals or organizations that conduct these terrorist acts, the premeditated and rational characteristic of the pursuit of their objectives, the important role of violence which is often of an extreme nature, and the intended impact on a broad audience which is well beyond the direct targets, (Llussa and Tavares, 2011). However, terrorism is evidently a continuous act which continues to evolve in many new ways. This, therefore, calls for in-depth studies of its determinants and consequences.

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To understand the economic impact of terrorism, several themes and approaches have been put in place. The study has been organized according to seven different themes which include: determination of terrorist activity, the features of terrorists, the utility cost of terrorism, the effects of terrorism on aggregate output, terrorism and particular sections of activity, terrorism and economic policy, and counter-terrorism, (Llussa and Tavares, 2011). This research study examined 148 papers on the field of terrorism with each paper falling under one of the seven themes mentioned above. The topical distribution showed that little effort had been given to analyzing the utility cost of terrorism in addition to the effect of terrorism on aggregate output, two of which are extremely critical topics. The few number of studies on the effects of terrorism on fiscal and financial policy is most likely justified by the small policy importance of such an issue.

The second classification of the economics of terrorism is on the approach which is either macro or micro, (Llussa and Tavares, 2011). The microeconomic approach includes studies that focus on the behavior of individuals, groups or business firms, with the emphasis on individual incentives. Studies that describe or explain the behavior of aggregate economic variables, such as output or its main components are classified as using a Macroeconomic approach. The third classification is on the methodology of the study from the literature. The two commonly used methods are empirical or theoretical methodology. Therefore, studies on the economics of terrorism are classified under the four categories of either macro or micro, and empirical or theoretical.

As mentioned above, domestic terrorism is more prevalent than before thought especially so in democratic nations, (Sautter, 2010). An ITERATE collection of terrorist acts in the past three decades shows that a majority of the incidents was neither international in scope nor initiated by religiously motivated groups. Additionally, most of these acts were initiated by individuals indigenous to the states in which the attacks occurred, with the victims being largely from those states. Research has shown the important role democratic institutions play in determining the frequency of terrorist acts. The existence of these institutions has a direct positive relationship with incidences of terrorism, (Parker, 2007). This is associated with the liberal rules and freedom under a democratic regime, which allows terrorist organizations to operate freely. Ideally, individuals will tend to take advantage of the political process as opposed to violent opposition if the costs of political participation are considerably lower. When there are fewer obstructions to participation, its costs are inherently lower, and this is what terrorists maximize on.

There are different models that are used in the studies of the economics of terrorism, whether transnational or domestic. However, there exist distinct features that differentiate domestic and transnational models, (Sautter, 2010). First, in international cases, the victim and the terrorist are from different populations or countries while domestic terrorists recruit from all parts of the society and share nationality with the people they are attacking. Secondly, asymmetric information and signaling are very different between the two. Domestic terrorism is a process of signaling utilized by a political dissident in an attempt to directly sway citizens, while transnational terrorism is normally perceived as an indirect influence. In domestic terrorism, a very basic model of microeconomics can be used to hypothesize the influence a democratic government might have on the sorts of strategies that terrorists use. In the past, mathematical models have been used to explain terrorist behavior. The discussion here, however, focuses on the relationship between terrorists and governments. Among other determinants, voters, who are the citizens of a country, play an important role in influencing how governments respond to acts of terrorism.

The model that will be discussed in this essay considers three agents around which terrorism acts revolve. These are terrorists, voters, and politicians. The model assumes a democratic system of government with a direct election for representative government. Under this scenario, terrorists aim to commit illegal violent acts to push for their political beliefs; voters want to maintain their safety and stability and hence decide their government through voting, and politicians desire re-election and will, therefore, optimize anti-terrorism government policies to maximize their chances of being re-elected.

To understand the contribution of microeconomics to terrorism, and in particular domestic terrorism, the model used will explore three types of utilities derived from the three agents surrounding terrorism acts. These utilities are terrorist utility, voter utility, and government utility, (Sautter, 2010). The terrorists utility is a function of triple variables namely the damage the terrorist will be willing to commit, the probability of successfully completing the intended acts of terrorism, and a proxy for the mean of government policy in the past. Government policies include counter-terrorism bids, putting in place security measures or any other government program that was employed to retaliate against or protect citizens from terrorist acts. As the government policy towards terrorism is intensified, a terrorist will get disutility and vice versa. It is also evident that a terrorist will be constrained by the cost of their chosen amount of damage and that he will maximize his utility by choosing the optimum damage that gives a certain probability of success having insight on the government policies against terrorism. From a terrorists perspective, the government policy is a function of the mean of all past violent activities.

Voter utility is a function of the same variables as the terrorist utility which are the damage terrorists are willing to attempt, the probability of successful terrorist acts, and a mean of the government policy in the past, (Sautter, 2010). The model here shows a behavior that voters or citizens weight the future more than the past. For instance, before the 2001 attack, American citizens did not perceive a terrorist threat even though the risk of a successful attack was high. This changed after the attack. Despite the overhaul of airline security regulations, new emphasis on the threat posed by terrorists in government intelligence organization, and the establishment of a Homeland Security Administration which have reduced the danger of future attacks, the public perceives that the risk of future attacks is high. Voters are assumed to place more emphasis on future risks of attack than they do on the past incidences.

Voter utility function results in several outcomes. One, voters have information regarding the historical mean and standard deviation of the attempted damage because they know the terrorist's density function as well as the variance of their earlier activities of violence. However, while these past acts of terror provide voters with information on the scope of the damage, it should only be regarded as a theoretical general guide to them since it does not provide specifics. Second, as the amount of damage increases, the probability of success decreases. This is derived from the fact that attacks that target a larger number of people or inflict more economic damage are more complex, costly, and therefore involve a higher probability of failure, (Sautter, 2010). Ideally, voters are interested in national security and stability. Third, though damage, probability, and policy are exogenous to the voters utility function, they are seen as maximizing utility when a government pursues a policy that provides for the most stability to the society. For example, following an attack, voters will evaluate their government based on their perception of how the administration responded to the attack. The model also shows the effect on voters utility with a change in government policy following an attack. The voters reaction to the damage perpetrated by a terrorist in light of the government response can be described as an expression of sensitivity to the terrorist violence or as sensitivity to the government response. The difference in these two equations should be zero; otherwise, it would mean that the government does not respond to political violence in a proportionate and effective manner. This model assumes that the government will play its game round and will always have a response.

The importance of the voter utility model is the ability to show why the terrorists employ the methods that they use. By expanding the variance and decreasing their mean level of violence, terrorists have the ability to decrease government response and increase their signaling potency on the average voter or citizen. They also attempt to cause fear and panic to citizens so as to sway them into pressuring the government into making political concessions. Each expression in the sensitivity to violence causes negative utility for the voter. Increases in the randomness of violence increase voter disutility. On the other hand, voters garner positive utility from the reassuring feeling and stability brought about by an increase in government policy in the society. Additionally, voter utility is increased from seeing the government change its policy to match the new threat posed or the new expected future value of the damage.

The government utility function is only concerned with getting re-elected. The government in place will maximize the policy, given the damage and the probability of successful attacks so as to maximize chances of re-election, (Sautter, 2010). Unlike voters who place more emphasis on the future, politicians are assumed to place more importance on the present. Mostly, if not re-elected in the forthcoming round of elections, the government will take a back seat in policy regarding terrorism. In reality, the overall voters' utility is laid inside the government's utility function and is expressed by the voters feeling toward th...