On the optimal retaliation against terrorists: The paid-rider option

We examine whether nations, faced with the threat of terrorism, will be motivated to engage in the efficient amount of retaliation against terrorists. We demonstrate that the problem confronting the efforts of nations to achieve an optimal retaliation against terrorists is understated by the traditional free-rider analysis. In particular, nations have the option of actually selling or reducing the public good of retaliation, provided through the efforts of others, by offering safe havens to terrorists in return for the terrorists' pledge to attack elsewhere. This paid-rider behavior is also shown to apply to other public good scenarios.The authors gratefully acknowledge the helpful comments of Gordon Tullock on an earlier draft. Sole responsibility for the paper's content rests with the authors. Todd Sandler's research was supported by a Science and Humanities Research Institute Summer Grant at Iowa State University.