Terrorism deterrence in a two country framework: strategic interactions between R&D, defense and pre‐emption

In this paper, we analyze the equilibrium responses (in terms of defense, R&D and preemption) to a potential terrorist attack in a two‐country framework (Home and Foreign) using a multi‐stage game with imperfect information. We highlight three different types of strategic interactions: (a) how the choice of defense, R&D and pre‐emption affects the choice of the same in the other country (strategic interdependence across countries); (b) the strategic interaction between the instruments of terrorism deterrence, namely, defense, R&D and pre‐emption in a given country and (c) the strategic interaction between the terrorist and the defender. Our main results are as follows: (i) defense effort in Home is a strategic complement to the defense effort in Foreign. (ii) Even without R&D sharing between countries, we find that R&D effort in one country is a strategic substitute to that in the other; (iii) similar results hold for pre‐emption because of its public good nature; (iv) for a given country, defense and R&D efforts may be strategic substitutes or complements depending on the magnitude of the ratio of weighted expected damage between Foreign and Home; (v) R&D and pre‐emption may be strategic substitutes or complements depending on the magnitude of the elasticity of damage and (vi) an increase in the likelihood of the terrorist being weak reduces defense effort, may increase or decrease R&D depending on the magnitude of elasticity of damage but increases pre‐emptive effort in both countries.