Underfunding in Terrorist Organizations
June 19, 2005
Abstract
A review of international terrorist activity reveals a recurring
pattern of financially strapped operatives working for terrorist
organizations that seem to have plenty of money. To explain this
observation, we present a hierarchical model of terror organizations in
which leaders must delegate financial and logistical tasks to
middlemen for security reasons. These middlemen do not always share
their leaders’ interests. In particular, the temptation exists to skim
funds from any financial transaction. When the middlemen are
sufficiently greedy, and when organizations’ budgets are sufficiently
constrained, leaders choose not to fund attacks in equilibrium because
the costs of skimming are too great. Further, we find important non-
linearities in terrorists’ response to government counter-terrorism.
Given constrained funding for terrorists, government efforts yield few
results until they reach a threshold, at which point cooperation
between leaders and middlemen in terrorist groups breaks down,
leading to dramatic drops in the probability of terrorist success.
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