Economic sanctions, transnational terrorism, and the incentive to misrepresent

Can economic sanctions combat transnational terrorism effectively? Policymakers argue that sanctions can deter state sponsorship, but are counterproductive against hosts of transnational terrorists. However, recent cases indicate that governments are often uncertain if foreign states are truly sponsors versus hosts, and cannot perfectly determine the type of foreign support terrorists are receiving. We argue that this uncertainty, coupled with the proposed strategy of punishing sponsors while cooperating with hosts, creates incentives for sponsors to misrepresent themselves as host states while continuing their support for terrorists. Using a game theoretic model, we demonstrate that in this environment of uncertainty, governments rely on information regarding the state capacity of supporting states to deduce their relationship with terrorists. Consequently, governments are more likely to impose sanctions against foreign states with intermediate levels of state capacity, but are less likely to impose sanctions against failing or stronger states. Our empirical test using the Threat and Imposition of Sanctions (TIES) dataset and the Global Terrorism Data (GTD) provides robust support for this hypothesis.