Terrorist Signaling and the Value of Intelligence

Daniel G. Arce M.
Robert D. McCallum Professor of Economics & Business
Rhodes College


We examine a model of terrorist attacks as signals where the government is uncertain as to whether it is facing a group that is politically motivated or militant. Pooling equilibriums result with two types of ex post regret: P-regret, where the government concedes to political types that would not subsequently attack; and M-regret, where the government does not concede to militant types that subsequently attack at greater levels. Avoidance of such regret defines a measure of the value of intelligence. Counterterrorism policy can then be characterized in terms of whether a government should focus on increased intelligence versus increased security (hardening targets). The recommended use of asset freezing is also evaluated in terms of the resources required by terrorists to achieve the various equilibriums. Finally, the paper supports the empirical finding of intertemporal substitution of resources by terrorists, concerned with the level of government response to their attacks.