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Citation Information

Type Working Paper
Title The Economic Causes of Terror: Evidence from Rainfall Variation and Terrorist Attacks in Pakistan
Publication (Day/Month/Year) 2013
URL http://www.iza.org/conference_files/YSP2013/aman_rana_s9081.pdf
How do rainfall induced rural employment shocks affect terrorist violence? There can be two opposite effects i.e. labour supply and terror finance. A positive rainfall shock to the agrarian sector raises the relative wages across agrarian and terror sector and potentially reduces terrorist labour and violence. This is the opportunity cost or labour supply effect. Alternatively, in the societal context of Pakistan - with employment elastic religious charitable donations and information asymmetry in the religious charity market captured to some extent by militants - a positive rainfall shock to the agrarian sector potentially increases terror financing and production. This is the terror financing effect. Exploiting the fact that Pakistan is a predominantly poorly irrigated, agricultural economy, I use district level panel data from 1997-2010 on rainfall shocks as an instrument for rural employment to identify the net effect of rural employment shocks on terrorist violence in Pakistan. Results suggest that a one percentage point increase in rain induced- rural employment results in an increase in the probability of a terrorist attack by 8.09 percentage points and an increase in the number of terrorist attacks by 0.5697. Results remain robust and consistent with finance rather than the labour supply as the relative dominant channel through which rural employment affects terror production in districts of Pakistan.

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