This paper analyzes the impact of terrorism on Israeli companies related to the defense, security or anti-terrorism industries, relative to its impact on the rest of the companies. We match every Israeli company to the American company with the closest expected return among all the companies that belong to the same industry and trade in the same market in order to isolate the effect of terrorism from other common industry shocks. The findings show that whereas terrorism had a significant negative impact of 5% on non defense-related companies, it had a significantly positive overall effect of 7% on defense-related companies.

The literature on conflict and terrorism has paid little attention to the economic costs of terrorism for the perpetrators. This paper aims to fill that gap by examining the economic costs of harboring suicide terror attacks. Using data covering the universe of Palestinian suicide terrorists during the second Palestinian uprising, combined with data from the Palestinian Labor Force Survey, we identify and quantify the impact of a successful attack on unemployment and wages. We find robust evidence that terror attacks have important economic costs. The results suggest that a successful attack causes an increase of 5.3 percent in unemployment, increases the likelihood that the district’s average wages fall in the quarter following an attack by more than 20 percent, and reduces the number of Palestinians working in Israel by 6.7 percent relative to its mean. Importantly, these effects are persistent and last for at least six months after the attack.

This paper relies on the variation of terror attacks across time and space as an instrument to identify the causal effects of terrorism on the preferences of the Israeli electorate. We find that the occurrence of a terror attack in a given locality within three months of the elections causes an increase of 1.35 percentage points on that locality’s support for the right bloc of political parties out of the two blocs vote. This effect is of a significant political magnitude because of the high level of terrorism in Israel and the fact that its electorate is closely split between the right and left blocs. Moreover, a terror fatality has important electoral effects beyond the locality where the attack is perpetrated, and its electoral impact is stronger the closer to the elections it occurs. Interestingly, in left-leaning localities, local terror fatalities cause an increase in the support for the right bloc whereas terror fatalities outside the locality increase the support for the left bloc of parties. Given that a relatively small number of localities suffer terror attacks we demonstrate that terrorism does cause the ideological polarization of the electorate. Overall, our analysis provides strong empirical support for the hypothesis that the electorate shows a highly sensitive reaction to terrorism.

This article investigates the interaction between terror attacks and electoral outcomes in Israel. The authors analyze a dynamic model of reputation that captures the salient characteristics of this conflict. The equilibrium of the theoretical model generates two precise empirical predictions about the interaction between terrorism and electoral outcomes. First, the relative support for the right-wing party is expected to increase after periods with high levels of terrorism and to decrease after periods of relative calm. Second, the expected level of terrorism is higher when the left-wing party is in office than it is during the term of the right-wing party. The authors test these hypotheses by using a newly created data set on terrorist attacks in Israel between 1990 and 2003. The first hypothesis is strongly supported by data culled from public opinion polls about the Israeli electorate’s political preferences. The second theoretical hypothesis is strongly supported by the three Israeli governments to which the theory can be applied that served during the studied time period.