No. 2026-27 - Risk Aversion in the Shadow of Terrorism

Abstract:

Terrorism affects individuals far beyond its immediate victims, with large economic consequences. We estimate the effect of terrorism on risk preferences by merging geocoded panel data with the Global Terrorism Database in a staggered difference-in-differences design comparing those within and beyond 25 kilometers of attacks in Germany. Exposure reduces willingness to take risks by 2 percent of a standard deviation—localized, peaking after one year, dissipating within five—implying welfare losses near 106 million Euro annually. We classify 60,000 news articles with a fine-tuned language model and separate two media channels: the salience and the emotional tone of coverage. Holding attack severity fixed, responses are concentrated among attacks with more extensive and more negative coverage. The survey data corroborate media transmission—respondents who do not read newspapers do not respond—and point to declining happiness as the emotional mechanism. After severe attacks, self employment falls by 2 percentage points.