Bank of Israel Research Department Targeted Killings: Evaluating the Effectiveness of a Counterterrorism Policy 1 by Asaf Zussman * Noam Zussman ** Discussion Paper No. 2005.02 January 2005 1 The paper was updated and edited on October 2005. A condensed version is forthcoming in the Journal of Economic Perspectives. For their assistance with the data we thank Yoni Fighel, Shalom Harari, and Yochanan Tzoreff of the International Policy Institute for Counterterrorism and Arnon Regular and Dani Rubinstein of the newspaper Ha’aretz. We thank Isaac Ben-Israel, Steve Coate, Jeremy Pressman, Enrico Spolaore, Tim Vogelsang, Romain Wacziarg, Amos Zehavi, and participants of presentations at the Bank of Israel, Cornell Univ ersity, SUNY Binghamton, Te l Aviv University, and the 2005 American and Israeli Economic Association meetings for helpful comments and suggestions. * Economics Department, Cornell Universi ty. E-mail:
[email protected]. ** Research Department, Bank of Israel. E-mail:
[email protected]. Any views expressed in the Discussion Paper Series are those of the authors and do not necessarily reflect those of the Bank of Israel. 91007 , 780 " , Research Department, Bank of Israel, POB 780, Jerusalem 91007, Israel Abstract targeted killing (henceforth assassinati on) of members of Palestinian terrorist organizations was a major element in Israel’s counterterrorism effort during the Palestinian uprising which started in 2000. We evaluate the effectiveness of this policy indirectly by examining Israeli stock market reactions to assassinations. Our approach relies on the assumption that the market should react positively to news of effective counterterrorism measures but negatively to news of counterproductive ones. The main result of the analysis is that the market reacts strongly to assassinations of senior members in Palestinian terrorist organizations: it declines following attempts to assassinate political leaders but rises following attempts to assassinate military ones.