The Effect of Terrorism on Income Inequality

Abstract

Abstract Conflict research has recently found that increased inequality weakens institutional conditions, opening the door for terrorism. While this research often accounts for endogeneity, or the possibility of a reverse causal relationship, there has yet to be an empirical investigation of the impact of terrorism on income inequality. Using a sample of 139 countries between 1994 and 2018, we show that both domestic and transnational terrorism result in higher levels of income inequality. Our results are consistent for both pre- and post-tax and transfer inequality as well as multiple model specifications. Additionally, we explore multiple potential causal mechanisms that link terrorism and income inequality finding that the effect is, in part, due to terrorism’s negative effects on institutional stability, increased military expenditure, possibly to fund counterterrorism operations, and reduced foreign capital, especially for greenfield investment. Our analysis indicates a positive relationship between terrorism and inequality and the mechanisms that produce the effect, contributing to the terrorism and inequality literatures.