Limodio investigates the relation between terrorism financing and attacks through a panel of 1,545 Pakistani cities and exogenous variation in a Sharia-compliant funding source. Cities exposed to higher financing experience more attacks, with terrorist organizations reacting to temporary funding flows. Two methods lead to identifying an organization-financing channel. First, a city-organization variation allows: a) dissecting the demand and supply of terrorist attacks, with supply exclusively explaining these results; b) estimating the elasticity of attacks to financing (0.08). Second, a measure of terrorist recruitment, calculated using dark web data and machine-learning, exhibits complementarities with financing in increasing attacks.
Nicola Limodio is Assistant Professor of Finance at Bocconi University.