Terms-of-Trade and Counterterrorism Externalities

Posted: 7 Jul 2017

See all articles by Subhayu Bandyopadhyay

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Todd M. Sandler

University of Texas at Dallas - School of Economic, Political and Policy Sciences, Department of Economics & Finance

Javed Younas

American University of Sharjah - Economics Department

Date Written: 2017-06-01

Abstract

This paper investigates the interplay of trade and terrorism externalities under free trade between a developed nation that exports a manufactured good to and imports a primary product from a developing nation. A terrorist organization targets both nations and reduces its attacks in response to a nation’s defensive counterterrorism efforts, while transferring some of its attacks abroad. Terms-of-trade considerations lead the developed nation to raise its counterterrorism level beyond the “small-country” level, thus compounding its over provision of these measures. By contrast, the developing nation limits its defensive countermeasures below that of the small-country level. The analysis is extended to include proactive countermeasures to weaken the terrorist group. Again, the developed country raises its efforts owing to the terms-of-trade externality, which now opposes the under provision associated with proactive efforts. A second extension allows for several developing country exporters of the primary product.

Keywords: Terms-of-trade externalities, transference externalities, terrorism, defensive counterterrorism, proactive counterterrorism

JEL Classification: D62, H41, H56

Suggested Citation

Bandyopadhyay, Subhayu and Sandler, Todd M. and Younas, Javed, Terms-of-Trade and Counterterrorism Externalities (2017-06-01). FRB St. Louis Working Paper No. 2017-17. Available at SSRN: https://ssrn.com/abstract=2997943 or http://dx.doi.org/10.20955/wp.2017.017

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

Todd M. Sandler

University of Texas at Dallas - School of Economic, Political and Policy Sciences, Department of Economics & Finance ( email )

Richardson, TX 75083
United States

Javed Younas

American University of Sharjah - Economics Department ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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