The Importance of Psychology in Economic Activity: Evidence from Terrorist Attacks
Terrorist attacks influence economic growth and individual psychology. However, identifying the direct effect of terrorism on economics and psychology is difficult because institutions also change in response to terrorist attacks. This paper controls for institutional responses to terrorist attacks by studying people who live beyond the institutions' borders, but are exposed to the attacks. I find that terrorism leads to declines in trust, subjective well-being, and the importance of creativity and freedom. However, at the macro-level, terrorism leads to increases in economic output and household income. These results are consistent with a growing literature that finds counterintuitive responses to trauma.
I thank Fernando Anjos, Cary Frydman, Arjen Siegmann, Jose Tavares and seminar participants at the American Economic Association Annual Meeting, Nova School of Business and Economics, Texas A&M University, University of British Columbia, and University of Porto. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.