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

Abstract

Terrorist attacks influence economic growth and individual psychology. However, identifying the direct effect of terrorism on economics and psychology is difficult because institutions also change in response to terrorist attacks. This paper controls for institutional responses to terrorist attacks by studying people who live beyond the institutions' borders, but are exposed to the attacks. I find that terrorism leads to declines in trust, subjective well-being, and the importance of creativity and freedom. However, at the macro-level, terrorism leads to increases in economic output and household income. These results are consistent with a growing literature that finds counterintuitive responses to trauma.

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

JEL Classification: E20, K42, O10