The Importance of Psychology in Economic Activity: Evidence from Terrorist Attacks
Kenneth R. Ahern
University of Southern California - Marshall School of Business
July 17, 2012
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, O10working papers series
Date posted: June 16, 2012 ; Last revised: July 18, 2012
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