ABSTRACT
This paper considers an economy where groups compete in a contest for power to redistribute future income in their favour. An increased external threat of terrorism – either an increase in the likelihood of a successful terrorist attack or a greater loss of income in the event of a successful attack – would tend to reduce the expected value of the contest prize and thus lessen the severity of the conflict at home. However, unless the marginal return from guarding against terrorism is not too large or diminishes at a sufficiently fast rate, such a shock could imply, in equilibrium, both a greater sense of security among the groups against external threats and a greater conflict between them in the domestic struggle for power.
