The Importance of Psychology in Economic Activity: Evidence from Terrorist Attacks

Abstract:     
This paper presents new causal evidence that psychology affects macroeconomic outcomes by exploiting terrorist attacks to identify sudden and exogenous shifts in psychological traits. To control for reverse causation and confounding institutional responses, I study foreigners affected by terrorism in their home country. First, I find that expatriates' exposure to foreign terrorist attacks leads to substantial declines in trust, subjective well-being, and the importance of creativity and freedom. Second, when foreign-born populations have greater exposure to terrorism, local economic output and household income increase. Possible explanations for the positive effect of psychology on economic outcomes are discussed.

Number of Pages in PDF File: 47

Keywords: Psychology, trust, culture, terrorist, terrorism, GDP, Madrid Train Bomb, London Metro

JEL Classification: E20, K42, O10

working papers series