The analytical foundations of extortionate terrorism

Extortionate terrorism is the threatened use of terrorist acts to gain concessions from the victim. In this article, game theory is used to seek answers to the following questions: (a) When will people resort to extortionate terrorism? (b) When will extortionate terrorism succeed and when will it fail? (c) What constitutes an “optimal” threat, i.e., what bribes, extortion, ransom, or payoff should be asked in exchange for which hostages or property? (d) When should unsuccessful threats be carried out and when should they be abandoned? (e) How should a victim choose among potential responses to specific terrorist threats and to the general problem of terrorism? Two different game theoretic models of terrorism are examined— one using ordinal preferences, the other von Neumann‐Mor‐genstern utilities. Terrorism is considered not simply as isolated incidents; institutions are potential victims of repeated terrorism. The terrorist and the victim, in formulating a response to each incident, are guided not only by present gains and losses, but by the effect their response has on others’ perception of their credibility and resolve—two long‐run variables.