Exploring the dynamics between terrorism and anti-terror spending: Theory and UK-evidence

▶ Game theoretic model of the relationship between terrorism and anti-terror spending. ▶ Non-linear relation between terrorism and counter-terrorism spending. ▶ Empirical Markov-switching model with UK data provides evidence in favor of this approach. ▶ Probability of transiting into a state with high terror is smaller if defense spending is high. Recent years have seen governments restricting civic freedoms and legislating significant increases in spending to combat terrorist activities. In this paper, we investigate the relationship between anti-terror spending and terrorism. In line with previous findings in the empirical literature on terrorist activity, our game-theoretic model of the interaction between a benevolent government and a terrorist organization is suggestive of a non-linear relation between terrorism and counter-terrorism spending. Using UK data, our empirical Markov-switching implementation provides evidence in favor of this approach. The empirical results also show that the probability of transiting into a state with high terror is smaller if defense spending is high.