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Federal Reserve Bank of St. Louis
Working Papers
Foreign aid as counterterrorism policy
Subhayu Bandyopadhyay
Todd Sandler
Javed Younas

We present a model where foreign aid bolsters proactive counterterrorism efforts of a foreign nation that is a source for transnational terrorism. Our two-stage game has the donor country choosing a first-stage contract consisting of terrorism-fighting tied aid and general assistance. In stage 2, the donor decides its defensive measures, while the recipient country chooses its proactive measures. An interesting finding is that the foreign enforcement best-response function is likely to reflect strategic substitutes, while the donor's enforcement best-response function is apt to indicate strategic complementarity. A rise in terrorism in the donor increases home enforcement but may limit foreign enforcement at given aid levels. A rich set of scenarios depends on the strategic identity of the countries' countermeasures and the recipient's regime stability. Surprising and varied outcomes follow.

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Subhayu Bandyopadhyay & Todd Sandler & Javed Younas, Foreign aid as counterterrorism policy, Federal Reserve Bank of St. Louis, Working Papers 2009-021, 2009.
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Keywords: Terrorism ; War - Economic aspects
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