Chapter 4 in Terrorism Financing and State Responses: A Comparative Perspective (Stanford 2007), edited by Harold Trinkunas and Jeanne K. Giraldo.

This chapter uses a rational choice approach to examine the political economy of terrorist financing. To date, much of the theoretical literature and almost all government-sponsored reports discuss terrorist organizations as though they are made up of ideologically driven purists who share a uniform commitment to the cause. This assumption is needed to explain how these organizations can both (1) efficiently distribute funds and (2) operate covertly without the checks and balances most organizations require. However, upon closer inspection, one often sees substantial differences in the preferences of key players in terrorist networks. Two selection processes explain why these differences exist, and a principal-agent framework shows how these differences lead to inefficiencies in terrorist financial systems. Terrorist organizations face a trade-offbetween enduring the inefficiency or employing corrective strategies that create vulnerabilities. Governments can undertake specific actions to make this trade-offmore problematic.

The book examines financial and material resources, correctly perceived as the life blood of terrorist operations. Governments have determined that fighting the financial infrastructure of terrorist organizations is the key to their defeat. Since the attacks of September 11, 2001, a good deal has been learned about sources and mechanisms used to finance the "new" terrorism, which is religiously motivated and exponentially more deadly than previous generations of terrorist organizations. New policies have been devised to combat the threat and existing policies have been enacted with greater vigor than ever before. Five years into the battle against terrorist financing, it is time to take stock of the emerging literature on terrorist financing, cut through a number of myths that have developed around the issue, and assess the current policy debates.

Through a series of thematic chapters and organizational and regional case studies--examining terrorist organizations such as Al Qaeda and Hezbollah, and regions such as East Africa, Europe, Latin America, the Middle East, and South East Asia--the authors provide a comprehensive assessment of the state of our knowledge about the nature of terrorism financing, and the evolution and effectiveness of terrorist strategies and government responses. This volume focuses on the preferences of major actors within terrorist networks and government agencies and the domestic and international contexts in which they make decisions and execute their strategies. It argues that both terrorism financing and government responses face problems of coordination, oversight, and information asymmetries that render them vulnerable to disruption.