Terror networks and trade: Does the neighbor hurt?

This paper studies how network-related terrorism redistributes trade flows across countries, including those countries that are not a direct source of terror. We first develop a game theoretical framework with imperfect information on the spatial location of transnational terrorism to show how the r...

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Bibliographic Details
Published in:European economic review 2018-08, Vol.107, p.27-56
Main Authors: De Sousa, José, Mirza, Daniel, Verdier, Thierry
Format: Article
Language:English
Subjects:
Economics and Finance
Humanities and Social Sciences
Security
Terrorism
Trade
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Summary:This paper studies how network-related terrorism redistributes trade flows across countries, including those countries that are not a direct source of terror. We first develop a game theoretical framework with imperfect information on the spatial location of transnational terrorism to show how the resulting security measures produce a non-monotonic effect on the distribution of trade across countries. Neighbors adjacent to terror, even when they do not source it, have trade reduced through enhanced security measures, while countries farther away benefit from those security measures. Second, to empirically assess the distortional effects of terrorism on trade, we first estimate the structural gravity equation derived from our theory. Then, armed with the estimates of the partial effect of neighbor terror on bilateral trade, we perform a counterfactual experiment and confirm the non-monotonic general equilibrium effect of neighbor terror on trade.
ISSN:0014-2921
1873-572X
DOI:10.1016/j.euroecorev.2018.05.001