Economics of Terrorism

This post is based on a recent lecture by Eli Berman, which was based in large part on the paper “Sect, Subsidy, and Sacrifice: An Economist’s View of Ultra-Orthodox Jews“.

Much of human behavior can be analyzed through the lens of economics, including religious practice. Adam Smith had some thoughts on the matter in “An Inquiry into the Nature and Causes of the Wealth of Nations“, where he argued that competition among religious sects would lead to less political clout for the church and harder working church officials.

However, not much progress had been made in the ensuing 216 years. Eventually, Laurence Iannaccone picked up the mantle in 1992 and revolutionized the economics of religion by modeling religion as a club good — meaning that it is non-rival but excludable. That is, multiple people can practice the same religion at the same time, but individuals can be forbidden from practicing within a certain sect or church (e.g. through ex-communication). Thus, religion invites the free-rider problem, wherein certain practitioners don’t contribute to the religious experience but still get benefits.

At this point, we turn our attention to Laurence Iannaccone’s groundbreaking work. According to his model, free-riding agents diminish the experience of the entire group, and would ideally (for the sect) be restricted from practicing in the future. That is to say, an ideal sect — from a group member’s perspective — is mostly filled with people who will devoted their time to the practice. This way, each of the members is willing to spend time taking care of the others within the sect based on anticipated reciprocity, providing a sort of insurance for members. Berman described an ideal sects in terms of an ideal study group: you want members to have read the papers you will be discussing, so you want to incentivize members to spend their time reading. This can be done by limiting study partners’ outside options (e.g. no drinking on weekends) or by expelling members who don’t contribute.

People who have relatively low wages (and thus a lower opportunity cost of time) are theoretically more willing to devote their time to religion — a hypothesis that is empirically validated (see this paper for more detailed proof). Thus, under this model, churches might want to attract low wage individuals in order to provide a better experience for the group as a whole. (Note that attracting richer individuals who substitute time for donations also plays a role in more complicated models, but recruiting lower wage individuals will nevertheless increase the benefits to joining a particular sect.) Since the church cannot observe their practitioners’ wages, how can they exclude high wage people masquerading as low wage people? In terms of the study group analogy, how can the members tell if a potential new recruit is willing to put in the time and do the reading?

It turns out that this is a signaling problem; thus the church thus has to design incentives such that low wage and high wage people self select (or separate) in equilibrium.  There are two ways a church goes about this: prohibitions and sacrifices. Strict dress codes, the barring of alcohol/caffeine/sex, and time commitments are examples of prohibitions and sacrifices imposed by some religions. Together, these tools can be used to weed out high wage earners who value their time relatively more. That is, high earners are more likely to prefer working more and forgoing these particular restrictions as opposed to joining the sect, dedicating a substantial amount of time, and following the strict rituals. Bringing back the analogy of the study group, setting up meetings on Friday or Saturday nights (thereby increasing the costs of going out drinking) might increase the likelihood that members read prior to meetings, thereby making meetings more productive.

Connecting the economics of religion to terrorism, Berman and Iannaccone argue in “Religious Extremism: The Good, the Bad, and the Deadly” that the aforementioned religious organizational structure is a major contributor to violent terrorism, more so than a belief in afterlife rewards or a specific theology.  To develop this intuition, consider a violent organization intent on conducting an act of terrorism. In order to succeed, the group must plan the attack, which requires coordination among the members. However, coordination invites the threat of defection, since any member could turn on the group and receive a large reward. How can these terrorist organizations reduce the likelihood of defection?

Just like the aforementioned radical sects, these violent organizations will seek members who are willing to sacrifice their time and succumb to prohibitions. In other words, radical sects provide a ready-made pool of ideal participants from the point of view of these terrorist groups; the core members of these sects are a self-selected pool of highly committed individuals with a low opportunity cost of time who are willing to endure various prohibitions to be part of the club. This idea is reflected in interviews of jailed terrorists, who tend to join their respective violent organizations for many of the same reasons that people join certain religions or political parties.

To test this idea, one can compare the violent behaviors of different sects within an overarching theology. Berman and Laitin’s “Religion, terrorism and public goods: Testing the club model” provides us with just this empirical test; their findings confirm that members of religious groups that require more sacrifices and prohibitive behaviors attempt significantly more attacks (and are more effective) than others with similar, less prohibitive beliefs.

So, where do we go from here? Since most of the violent organizations come from relatively impoverished countries, Eli Berman suggests that increasing access to public goods and property rights is fundamental. Providing more public goods will lead to less demand for the “clubs” that are religious sects and violent terrorist organizations, since would be members would have more alternatives to receive the benefits that these groups are relied upon to provide. In addition, improved property rights and contract enforcement would partially solve some of the missing market problems that incentivize people to join radical sects; if people don’t have to worry about losing their food supply or their home, joining a radical sect is relatively more costly. Finally, since all models are imperfect descriptions of reality, social scientists should continue to focus on these topics so that we may derive better policy going forward.




If you’re interested in learning more about this, I suggest reading the sources below or visiting Eli and Laurence’s websites to find some cool papers.


Berman, Eli, “Sect, Subsidy and Sacrifice: An Economist’s View of Ultra-Orthodox Jews,” Quarterly Journal of Economics, August 2000

Berman, Eli, and David D. Laitin. “Religion, Terrorism and Public Goods: Testing the Club Model.” Journal of Public Economics 92.10-11 (2008): 1942-967.

Iannaccone, Laurence R (1998) “Introduction to the Economics of Religion,” Journal of Economic Literature, 36, pp. 1465-1496.

Iannaccone, Laurence R. “Sacrifice and Stigma: Reducing Free-riding in Cults, Communes, and Other Collectives.” Journal of Political Economy 100.2 (1992): 271-91.

Iannaccone, Laurence R., and Eli Berman. “Religious Extremism: The Good, the Bad, and the Deadly.” Public Choice 128.1-2 (2006): 109-29.

Post, Jerrold, Ehud Sprinzak, and Laurita Denny. “The Terrorists in Their Own Words: Interviews with 35 Incarcerated Middle Eastern Terrorists∗∗This Research Was Conducted with the Support of the Smith Richardson Foundation.” Terrorism and Political Violence 15.1 (2003): 171-84.

Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations (Reprint of 1776 version) Modern Library: New York; 1965. Book V, Chapter I, Part III, Article III “Religious