This paper highlights five areas where economic analysis of terrorism has had the greatest policy relevance during the last 30 years. These areas involve evaluating the effectiveness of counterterrorism actions, identifying the causes of terrorism, measuring the economic ramification of terrorism, analyzing the time-series dynamics of terrorist events, and formulating game-theoretic representations of terrorism. The paper’s primary novelty lies in synthesizing past research and in identifying the key policy-relevant issues that require additional analysis. These issues include understanding the operation of global terrorist networks, ascertaining the payback of counterterrorism strategies, evaluating the returns from alternative forms of international cooperation, and investigating the strategic aspects of suicide terrorism. A procedure for tackling each of these policy concerns is offered.

Key words: Terrorism, counterterrorism, benefit-cost analysis, game theory, policy effectiveness, economic consequences.
JEL Classification: D74, H41, H56.