Insurance, Self-Protection, and the Economics of Terrorism

Published in: NBER Working Paper, No. W9215, Sep. 2002

Posted on RAND.org on January 01, 2002

by Darius N. Lakdawalla, George Zanjani

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This paper investigates the rationale for government intervention in the market for terrorism insurance, focusing on the externalities associated with self-protection. Self-protection by one target encourages terrorists to substitute towards less fortified targets. Investments in self- protection thus have negative external effects in the presence of rational terrorists. Government subsidies for terror insurance can discourage self-protection and limit the inefficiencies associated with these and other types of negative externalities. They may also serve as a complement to a policy of publicly provided protection.

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