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Working Paper 2009-021A

"Foreign Aid as Counterterrorism Policy"
by Subhayu Bandyopadhyay, Todd Sandler, and 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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Category > Applied Microeconomics
Category > International
Author > Subhayu Bandyopadhyay
Research Papers and Publications: JEL Code > H40
Research Papers and Publications: JEL Code > O10
Research Papers and Publications: JEL Code > D74