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This paper analyzes the terrorist threat following 9/11, and explores its implications for defense R&D. First, it reviews the composition of defense R&D since 9/11: big weapon systems still command 30% of defense R&D spending (legacy of the Cold War), vis‐à‐vis just about 13% for intelligence and anti‐terrorism. The second part examines the nature of the terrorist threat, and develops a simple model of terrorism, cast in a nested discrete choice framework. Two strategies are considered: fighting terrorism at its source, and protecting individual targets, which entails a negative externality. Intelligence emerges as the key aspect of the war against terrorism and, accordingly, R&D aimed at enhancing intelligence capabilities is viewed as the cornerstone of defense R&D.
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Keywords: Defense R&D; Dual‐use; Intelligence; Public goods; Terrorism

Document Type: Research Article

Affiliations: Eitan Berglas School of Economics, Tel Aviv University, Tel Aviv 69978, Israel, NBER and CEPR

Publication date: 01 June 2006

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